When is the right time to refinance if you have a low rate?
If you’re a homeowner, refinancing a mortgage could be a smart financial move. But deciding when to take that step is crucial in making sure it benefits you.
If you’re looking for a lower interest rate, a shorter loan term or just extra cash for home improvements, timing is the key for this decision to work for your situation.
Fortunately, you don’t have to make this decision alone. With careful planning and guidance, you can make refinancing work to your advantage without too much guesswork.
Start by exploring tailored loan options with Guaranteed Rate Affinity's Mortgage Refinance, and see how you could move forward with your financial goals.
The right time to refinance isn’t a one-size-fits-all answer, as there are several common scenarios where refinancing makes sense.
Tap into home equity with a cash-out refinance
If your goal in refinancing is to take out some cash to use for expenses, Guaranteed Rate Affinity has loan options that could replace your current mortgage with a larger loan to return the difference to you to spend as you need.
Called a cash-out refinance*, this loan uses the value you’ve built up in your home to determine how much you can borrow.
A cash-out refinance provides borrowers with a lump-sum payment in exchange for a larger mortgage. When you apply for a cash-out refinance, your lender will extend you a higher loan amount than your current mortgage and pay you the difference in cash.
Tapping into those extra funds can be appealing to homeowners who want to cover unexpected expenses or large-ticket items like repairs, upgrades or even college tuition.
Pay off high-interest debt
Refinancing can help consolidate high-interest debt, such as personal loans or credit card bills, and pay them off using cash from a refinance.
Ideally, this refinance is at a lower interest rate or brings other advantages with it. There's no secret to consolidating debt with a cash-out refinance, however. What you do with the cash from your refinance is up to you; once the money is in your account, you're free to consolidate those existing debts with it.
Why use a cash-out refinance for debt consolidation?
For many homeowners, the main driver is the interest rate. While personal loans and credit cards are both options for debt consolidation, they are unsecured loans that often have a higher interest rate than cash-out refinance rates.
Using your home's equity to consolidate higher-interest debts can bring with it all the other advantages of refinancing your mortgage, too.
Remove private mortgage insurance or FHA1 mortgage insurance premium
Refinancing your mortgage can be a strategy to remove private mortgage insurance (PMI), particularly if you have seen a significant increase in your home’s value or have made substantial improvements.
When you refinance, you could obtain a new loan that doesn’t require PMI if your new loan balance is less than 80% of your home’s current appraised value.
Keep in mind that refinancing comes with closing costs, so you’ll need to weigh these expenses against the potential savings from eliminating PMI and possibly securing a lower interest rate.
For FHA loans, borrowers must pay an upfront mortgage insurance premium (MIP) at closing and an annual MIP, which is included in the monthly mortgage payment.
If you put down less than 10% when you bought your home, you will be required to pay MIP for the life of the loan.
Unlike PMI, which can be eliminated when equity conditions are met, MIP is more rigid. The only way to eliminate MIP from an FHA loan, if you initially put down less than 10%, is to refinance the loan into a conventional mortgage.
This option allows you to switch from an FHA loan with MIP to a conventional loan without PMI if you have at least 20% equity in your home.
Shorten your loan term
Refinancing also offers an opportunity to adjust the structure of your loan.
If you’d like to shorten your loan term from 30 years to a shorter term like 15 years, refinancing could give you the flexibility to make those changes.
Shortening your loan term means you’ll pay off the loan faster and pay less in interest payments, but it’s important to consider whether you can manage the higher monthly payments that come with a shorter term.
Adjust to changes from life events
Big events like marriage, children or even retirement can shift your financial priorities.
If you’re planning for a major change in your finances, refinancing your home loan could help you adjust to a new budget by extending your loan term or securing a more predictable fixed-rate mortgage.
When should I wait to refinance?
Refinancing might not always be the best choice, and there are times when it may not provide the benefits you're seeking. Evaluating your situation is key to making the right decision.
Short-term plans to sell
If you plan to sell your home within a few years, refinancing may not be worth it. Potential savings could be too small to outweigh closing costs and other fees. In short time frames, refinancing rarely benefits homeowners.
High refinancing costs
When refinancing expenses such as closing costs and fees are high, they can reduce your savings. These costs could cut into any financial gain, making refinancing less worthwhile. Always compare the total expenses with the expected savings.
Minimal interest rate difference
If the gap between your current interest rate and the new rate is small, refinancing may not offer enough savings. The effort and costs involved may not justify the slight reduction in your mortgage payment. It's essential to calculate carefully.
Mortgage experts historically have said that a good time to refinance is when mortgage interest rates dip 1% below the rate you currently pay.
Low home equity
Refinancing with less than 20% equity in your home can increase your costs, such as PMI.
This makes refinancing less attractive, especially when the added expenses are considered. Ensure you have enough equity before refinancing.
How can I apply for a mortgage refinance?
Mortgage refinancing can provide significant financial relief, but it’s essential to understand the process.
Guaranteed Rate Affinity offers tailored loan options to help lower your interest rate, access home equity or adjust your loan structure.
Our streamlined process makes it easy to manage your payments and stay informed throughout every step of the refinancing journey.
Are you ready to take control of your finances? Explore Guaranteed Rate Affinity’s Mortgage Refinance options and start your journey today!
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate Affinity for current rates. Restrictions apply.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate Affinity does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate Affinity. Guaranteed Rate Affinity its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principal amount and will be paid off over the full loan term. Contact Guaranteed Rate Affinity for more information.
1Guaranteed Rate Affinity has no affiliation with any government agency.