When Is The Right Time To Refinance My Mortgage?

With average mortgage interest rates dropping, Wisconsin homeowners may be wondering if now is the right time to refinance. While it’s certainly appealing to lower your interest rate, there’s more to consider. Personal factors, such as how long you plan to stay in your home, will also go into your decision making. In this article, we’ll walk you through everything you need to consider if now is the right time to refinance your mortgage.

Refinancing Rates

How does refinancing work?

When you refinance your mortgage, you replace your current home loan with a new one. This means applying for a new mortgage and going through the usual steps like having your house appraised, undergoing a title search, and more.

Your new mortgage will also come with closing costs like your first one, so you want to be sure the benefits of refinancing outweigh the expense. Homeowners typically refinance to save money, either by switching from one type of loan to another or taking advantage of lower rates. Consider how long you plan to stay in your home after refinancing.

Why should I consider refinancing?

While saving on interest may be the most popular reason to refinance, it isn’t the only one. Here’s a complete list of reasons to refinance your mortgage. Consider how you could benefit from getting a new loan:

  • Save On Interest: Refinancing to take advantage of lower interest rates can reduce your monthly mortgage payment and help you save on the total amount of interest paid.
  • Shorten Loan Term: Refinancing to a shorter loan term can help you save on total interest and get your mortgage paid off faster. It will also increase your monthly payment amount, so make sure your budget can handle it.
  • Your Credit Score and DTI Ratio Improved: A higher credit score and lower debt-to-income (DTI) ratio can help you qualify for better loan terms, including a lower interest rate. Aim for a credit score of 740+ and keep your DTI below 40%.
  • Switch Loan Types: When you refinance, you can change your loan type. For example, move from an adjustable-rate mortgage (ARM) to a fixed-rate loan, or from an FHA loan to a conventional loan to drop mortgage insurance.
  • Cash out equity: If you’ve built enough equity in your home, you can refinance for a higher loan than your current mortgage balance and use the difference to pay for home renovations or other large expenses. A cash out refinance can provide affordable financing but remember that you’re still borrowing against your home. You want to be sure you can comfortably afford the higher payments.
Fixed Rate Mortgage

What are the costs of refinancing?

Refinancing your mortgage comes with many of the same costs as your original mortgage. When deciding whether or not to refinance, you need to weigh the additional costs against the potential savings and benefits.

Closing costs generally range from 2%-5% of the loan amount. Federally insured mortgage programs, such as VA and FHA loans, typically have lower closing costs.

Your Loan Estimate will break down the estimated closing costs on your mortgage refinance. This includes origination fees, underwriting fees, document recording, appraisal fees, and more.

Once you know your total closing costs, you can calculate your savings in interest and decide if it’s worth it. Generally, the longer you plan to stay in your home after refinancing, the greater your savings will be.

When does the savings from refinancing outweigh the cost?

Your break-even point with refinancing is just as important as your new interest rate. You can use a mortgage refinance calculator to determine how long you’d need to stay in your home after refinancing before you break even on the closing costs and interest savings. If you plan on moving in the near future, refinancing may not be the best step for you right now.

Break Even Point

How to calculate the breakeven point

To determine your break-even point with refinancing, add up the new costs such as fees, title costs, third-party costs, escrow, insurance, and so forth as listed on your Loan Estimate sheet. Then calculate your monthly savings from the new payment amount versus the old one. For example, if your old monthly payment was $2,000 and the new one is $1800, you’ll save $200/month. If your closing costs are $4,000, it would take a year and eight months to break even. After that, you’d start saving each month.

Of course, other costs factored into your monthly mortgage payment, such as taxes and insurance premiums, can fluctuate and affect your payment amount. But knowing your break-even point is a good place to start when deciding if a mortgage refinance is right for you.

Prepare for refinancing

If you decide that now is the right time for you to refinance, it’s helpful to prepare before you submit your application.

Review your credit score and history.

You can obtain free credit reports through Annual Credit Report.com. Check to make sure there are no errors or unauthorized new account openings.

Check to see if your credit card account offers free access to your credit score. If not, you can purchase a credit score report from Fico or any of the major credit reporting agencies. If your score is lower than the “Very Good” range of 740-799, you may want to spend some time building it back up before refinancing. The better your credit score, the lower the interest rate you can qualify for.

Don’t apply for any other new credit accounts.

Applying for new credit can cause your score to temporarily dip. When you’re about to start the mortgage application process, it’s best to hold off on other new credit applications.

Avoid large purchases

Now isn’t the time to draw down your savings by making large purchases–wait until after your refinance application is complete.

Wait to switch jobs

Starting a new job in the middle of the refinancing process will affect your pay history. As with new credit and large purchases, it’s best to wait to switch jobs. Essentially, you want to maintain financial stability from beginning to end of the refinancing application process.

About FVSBank

We are your local Wisconsin community bank, here to enrich lives and build connections in Fond du Lac, Oshkosh, Waupun, and neighboring communities. When you come to us for your mortgage in Wisconsin, you’re walking into more than just a bank. We strive to create a space where your financial dreams are our shared goals. As your hometown bank, we understand the local real estate market. We are here to help you discuss your options for mortgage refinancing in Wisconsin so you can get the most out of your new home loan. Check out our current offers and contact us to start the refinancing process.