How Do You Know When It's Time to Refinance?

If you own a home, you may have considered the idea of refinancing your mortgage. Doing so could lead to lower monthly payments, a shorter loan term, or even a switch from an adjustable rate to a fixed-rate mortgage.

However, the decision to refinance is not one to take lightly. For one, you’ll want to make sure it is absolutely necessary. So, how do you know when it's the right time to do it?

Let’s quickly go over the main signs indicating when it makes sense to refinance your mortgage.

1. When interest rates fall

If there ever was an opportune time to consider refinancing your mortgage, it’s when interest rates are dropping. As interest rates fluctuate, you may find that rates have dropped since you first obtained your mortgage, making it an opportune time to refinance and reduce your monthly payments.

As a rule of thumb, a 1% or more rate decrease could make refinancing worthwhile. Check out Ameris Bank refinance rates to do a quick comparison.

2. When your credit score improves

If your credit score has significantly improved since you initially purchased your home, you may qualify for more favorable refinance rates. A higher credit score demonstrates better financial responsibility, making you a more attractive borrower to lenders.

The average FICO Score in the U.S. is 714. If your credit score increased from 650 (Fair) to 720 (Good) on the FICO scale, you could qualify for lower interest rates, potentially saving you thousands of dollars over the life of your mortgage.

3. When your financial situation changes

Life circumstances change, and your financial situation may have evolved since you first bought your home. If you now have a higher income or have paid down significant debts, you may be in a better position to refinance and secure more favorable terms.

Most commonly, people who now have the cash to spend may opt to shorten the loan term. If you have a long-term mortgage but now want to shorten the loan term by making larger monthly payments, a refinancing agreement may be warranted. This helps you save on interest and become debt-free sooner.

4. When you want to cash out your home equity

If you’ve built significant equity in your home and need access to quick cash, you could consider cash-out refinancing. This option allows you to borrow against your home's equity, providing you with a lump sum of cash that can be used for various purposes, such as home improvements, debt consolidation, or other investments.

5. When you want to switch from adjustable-rate to fixed-rate mortgage

Adjustable-rate mortgages (ARMs) can be advantageous in the beginning, but they come with the risk of interest rate fluctuations. If you prefer the stability of a fixed-rate mortgage or anticipate rising interest rates, refinancing into a fixed-rate loan may be a wise choice.

Considerations before refinancing

  • Length of time in the home — Typically, the longer you’ve stayed in your home, the more it makes to refinance.
  • Pre-payment penalty — Some loans have a pre-payment penalty included in the agreement. This is an additional charge billed to you if you pay off your loan before a certain point in the term. Check your home loan agreement to see if this penalty applies.
  • Refinancing costs — Certain costs apply when refinancing your mortgage. These typically include payments for loan origination, home appraisal, and mortgage insurance.
  • Components that affect the refinance approval — Generally speaking, lenders will look at your income, credit score, payment history, the refinance amount, and current home appraisal of the house you want to refinance.

Talk to us about refinancing your mortgage

At Mortgages By Jill, we work with you to find the right home loan solutions in the Greensboro area. If you’re looking to refinance your mortgage or explore other loan options, we’re here to help ensure a smooth and successful process.

Schedule a quick 30-minute consultation now by calling 336-740-9068 or through our contact form.

mortgage refinance.jpg
Subscribe to our Alerts!
Let's keep in touch!

Stay updated on our news and events! Sign up to receive our newsletter.