Considering refinancing your mortgage? Before making a decision, homeowners should review the reasons for the refinance and what they hope to gain — whether it’s a lower rate, a shorter term or immediate cash.
“While homeowners can refinance at any time, most consider this option every five to seven years due to associated costs and the long-term benefits of a well-structured plan,” according to Steven Vieira, director of mortgage operations and sales for AAA Northeast.
Learn about home refinancing with AAA.
Is It the Right Time to Refinance?
Whether mortgage refinancing is worth it for you now depends on your current rate or term and how long you plan to be in the home.
“The higher your current rate is, the more savings you will find by refinancing,” Vieira said.
There are no restrictions on how often you can refinance if it makes financial sense each time you do it, according to Vieira.
The best times to consider refinancing your mortgage are when you want to lower your interest rate or monthly payments and when you need a considerable sum of money for home improvements, college education or debt consolidation.
Once you determine what you hope to achieve by refinancing, do a financial inventory. Check your credit score, income stability and current home equity. Most lenders require at least 20% equity remaining after the transaction.
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Read nowMortgage Refinancing Options
Refinancing can range from a straightforward rate-and-term refinance to more complex scenarios.
Rate-and-Term Refinance
The most basic approach to mortgage refinancing focuses on lowering the interest rate to generate monthly savings.
A straightforward way to evaluate this is by calculating the break-even point. To do this, divide the total closing costs by the monthly savings.
“For example,” Vieira said, “If closing costs are $3,750, and monthly savings are $75, the break-even point would be 50 months. After that period, the borrower begins to realize net savings.” So that would be: $3,750 ÷ $75 = $50.
Cash-Out Refinance
Transactions become more complicated when borrowers seek additional funds through a cash-out refinance. This type of transaction allows you to cash out a portion of the equity in your home by replacing your current mortgage with another, larger loan.
Common reasons for a cash-out refinance include debt consolidation, home improvements, buying out an ex-spouse or making accessibility upgrades.
“Often borrowers aim to achieve multiple goals in one transaction,” said Vieira. “This is where a licensed loan originator plays a critical role — conducting a thorough consultation, which typically takes between 45 and 60 minutes, to assess financial impacts and design a plan that aligns with the borrower’s objectives and budget.”
Home Equity Line of Credit
Another mortgage refinancing option is a home equity line of credit (HELOC), sometimes called a second mortgage. This involves borrowing against the value of your home. A lender approves a line of credit, and you make payments only on the amount of money you borrow.
“These can provide flexibility for expenses such as college tuition or phased home improvements,” Vieira said. “However, these options often carry higher interest rates and may involve adjustable terms, making careful evaluation essential to avoid overextending the household budget.”
A cash-out refinance is a one-loan solution that replaces your current mortgage and the cash you want to take out with one new, long‑term loan — usually at a fixed rate. While a HELOC is usually a shorter-term loan with an adjustable rate, for the first few years the lender is paying only the interest. That means the monthly payment goes up when the payment is recalculated to include interest and principal.
“The HELOC is a great loan for someone who understands the risk and can manage the higher cost by paying it off sooner than required,” Vieira said.
Steps to Refinance a Home
Once you decide to refinance and know how you are going to do it, Rocket Mortgage, one of the leading mortgage lenders in the U.S., suggests taking these steps.
- Determine the effect on your monthly budget by projecting the new loan amount, including reviewing potential interest rates, closing costs and monthly payments.
- Consult an expert. Arrange an appointment with a licensed mortgage loan originator, who can provide you with data about rates, terms, fees and payments. Find out if there are any limits on cash-out amounts or how the money is used.
- When it’s time to submit your application, ensure you have all the required documentation, including proof of income, descriptions of your property, tax returns and your credit history. Also, be specific about the amount of cash you need. The lender will review all your financial information and verify the property value by setting up an appraisal to figure out the amount of home equity is available to you.
- Pay the closing costs, if you didn’t roll them into the loan, and carefully look over the completed documents before signing them. Good luck with your new mortgage!
If you need assistance with a new mortgage or mortgage refinancing, contact a AAA mortgage specialist.
Have you ever refinanced your mortgage? Tell us in the comments.
Ellen is a content producer for AAA Northeast, covering automotive, finance, public affairs and electric vehicle news. She is a former newspaper reporter with experience writing for print and online publications about everything from higher education to sustainability. She recently returned to her native Long Island after living in Connecticut for 20-plus years, and has never met a beach she didn’t like.
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