Are you planning a move in the future but considering the benefits of refinancing your current mortgage?
Refinancing serves numerous purposes for homeowners, including opportunities for lower rates or securing cash for value-boosting renovations.
What's in this article?
In this article, we’ll explore which is preferable: refinancing before moving or staying on your current path.
Factors to consider before refinancing
Refinancing a mortgage involves replacing your current home loan with a new one.
There are several reasons a homeowner may want to consider refinancing, including to:
- Save money with lower interest rates and monthly payments
- Access equity in the home with a cash-out refinance
- Make home improvements or repairs before moving
- Pay off debts and improve your credit score
While there are many benefits to refinancing, homeowners have much to consider before taking this step.
Let’s look at these factors to help you determine the best course of action.
When do you plan to move?
The first significant factor to consider with a refinance is when you intend to move.
If you plan to move within the next year or two, the short-term benefits of refinancing may not justify the overall costs.
However, if you intend to move in five or more years, refinancing may offer you significant savings and benefits.
What are your current mortgage terms and conditions?
Homeowners who are in the early stages of repaying their mortgage or who have a high interest rate may benefit more than those who have paid most of their mortgage balance.
Additionally, homeowners with adjustable-rate mortgages (ARMs) can refinance to lock in a fixed rate.
What are the current interest rates?
Are current rates higher or lower than when you initially took out your mortgage?
If interest rates are lower than when you took out your mortgage, refinancing may help you save on interest and lower your monthly payments.
How much are the closing costs?
Similar to when you took out your current mortgage, your new mortgage will come with closing costs and fees.
Closing costs play a major role in whether refinancing is the right decision for a borrower.
This is known as the “break-even point,” or the time it takes for the savings from a refinance to cover the closing costs.
How much equity is in your home?
Homeowners with a significant amount of equity in their homes from years of diligently making their mortgage payments may not only qualify for better terms but also have the option of taking cash out.
Ready To Take Your Next Step?
The pros of refinancing before you sell your house
For the right borrower, refinancing can be a smart move. The decision depends on the intended timeline of selling your home and moving.
The best reasons to refinance before moving include:
- Lower monthly payments. Lower interest means lower payments, and that can translate into extra cash available to homeowners for moving-related expenses.
- Debt consolidation. Borrowers can use a cash-out refinance to consolidate high-interest debt and improve their credit score.
- Funding for projects. A cash-out refi also provides homeowners with immediate liquidity to cover home improvements or even cover the costs of packing, temporary housing or a down payment on a new home.
The cons of refinancing before moving
Every financial decision has potential drawbacks based on individual borrower needs and wants.
You may not want to refinance before moving if any of the following is true:
- You’re moving soon. If you’re planning to move within a year or two, it’s unlikely that you will have enough time to break even on the closing costs and fees unless interest rates have dropped significantly.
- The closing costs outweigh the benefits. Even if you benefit from refinancing with lower payments, the upfront expenses may cancel the benefits.
- You don’t want to reset your loan term. Refinancing often isn’t ideal for those who are near the end of their current loan term, because they won’t benefit from the long-term payment reductions. They may end up paying even more in interest over time.
Can you sell your house after refinancing? When it makes sense
In certain scenarios, refinancing before moving can be a financially smart decision for the homeowner.
Helpful examples include the following:
You’re not moving right away
Refinancing makes the most sense for those who are five or more years away from moving.
Homeowners with this time frame will have enough time to recoup the closing costs and fees and enjoy the financial benefits of refinancing.
Interest rates have dropped
A notable drop in interest rates can make refinancing worthwhile even if you’re moving soon.
A drop of even 0.5-1% can save homeowners hundreds of dollars each month, and this would result in savings that potentially are significant enough to outweigh other factors.
You want to improve your home before selling
With a cash-out refinance, homeowners can tap into their home equity and use it to upgrade or renovate the property.
Kitchen, bathroom or energy-efficient improvements may boost your home’s value and result in a faster and more profitable sale.
Alternative solutions to refinancing
Even if refinancing isn’t in the cards for you right now, you still have options.
Home equity loan or home equity line of credit
A home equity loan (HEL) or home equity line of credit (HELOC) allow borrowers to tap into their equity without refinancing.
- HEL: Provides an upfront, lump-sum payment that borrowers repay over time at a fixed interest rate
- HELOC: Functions like a credit card by providing a revolving line of credit borrowers can draw from as needed
HELs and HELOCs do not affect your primary mortgage, and the cash can be used for any purpose of the borrower’s choosing.
This alternative is helpful for homeowners who want to renovate or upgrade their home before selling, or consolidate debt to improve their credit.
Calculate whether refinancing makes sense for you
Compass Mortgage offers borrowers a convenient Refinance Calculator you can use to determine whether refinancing is right for you.
Plug in your loan amount, interest rate, loan term and start of payment to determine your savings per month.
Speak to a loan officer at Compass Mortgage
Compass Mortgage offers a range of loan products that can help homeowners achieve their pre-move goals, including refinance and cash-out refinance options.
We promise to be your advocate and partner throughout every step, helping you determine the best course of action based on your unique needs and financial situation.
Start your refinance process with our easy online form, and we’ll reach out with customized options!