In a hot real estate market where interest rates are low and home values are high, you’ll hear people talk about refinancing their mortgage or selling their home to cash out.

If you own your home, you might be wondering which move will be best for you.

Reasons To Consider Refinancing or Selling Your Home

Refinancing your mortgage and selling your home are, admittedly, very different things. Refinancing lets you restructure your financial obligations while staying in the same home. Selling cashes out your equity and lets you move on to your next home.

There are many reasons you might consider making either change, including:

  • You want to upsize or downsize your home.
  • Your finances have changed.
  • You found a new job and want to move closer to work.
  • You are retiring and want to be closer to family or friends.
  • Interest rates have dropped, and you want to reduce the cost of your mortgage.

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When Refinancing Makes Sense

When is it worth it to refinance? There are many scenarios where refinancing your mortgage can improve your situation. In general, refinancing is a good idea if it helps you meet an important financial goal.

You need more time to pay off your mortgage

Refinancing allows you to replace your existing mortgage with a new one. That gives you the opportunity to extend the repayment term of your loan. Doing so can reduce your interest rate and monthly payment, but expect it to cost you more in interest over the life of your loan.

You want to shorten your loan term

If you have a 30-year mortgage, you could refinance into a 15-year mortgage. This can be a good option for people who want to get out of debt more quickly.

Typically, reducing the term of your loan increases your monthly payment. However, 15-year mortgages historically have lower interest rates. They also leave less time for interest to accrue, meaning you could save money on interest in the long run.

You can get a lower interest rate

Mortgage interest rates are important because they directly affect your monthly payment and the overall cost of your loan. If you refinance to a lower interest rate, you could save money over the life of the loan.

Imagine you apply for a $200,000 mortgage with a loan term of 30 years. Your lender offers you an interest rate of 3%. You’ll pay $843 per month — not including insurance and taxes — for a total of $303,555 over the life of the loan. The same loan at 2% interest will cost just $739 per month, for a total of $266,126. A difference of 1 percentage point saved you more than $100 per month and almost $40,000 overall.

Do the math to make sure you’re truly saving money by refinancing. You should figure out the break-even point, which is how long it will take your savings to cover the cost of refinancing.

“Calculate the monthly difference between your current mortgage rate and the new mortgage rate — that’s your monthly savings,” says Steffa Mantilla, a certified financial education instructor based in Houston. “Now, divide that by the total cost for the refinance. This will tell you how many months you need to stay in your house until you break even on the refinance. Then any month beyond that is pure savings.”

According to Freddie Mac, the typical refinance costs about $5,000. You can use that number as a benchmark to figure out whether refinancing is a good move.

You want to change your interest rate type

When you refinance, you can weigh the benefits of a fixed-rate vs. adjustable-rate mortgage and decide whether you want to switch. This can be a good idea if your circumstances have changed.

For example, fixed-rate mortgages provide more security and predictability, and may be a better choice if you plan to stay in your home for the long haul. Conversely, ARMs typically have lower initial interest rates that can save you money in the short term. After that introductory period, the interest rate on your ARM will adjust, and you risk facing a larger monthly payment.

You want to tap into your home’s equity

A cash-out refinance lets you borrow against the equity in your home. If you have a good investment opportunity or need money for a major expense — such as paying for college tuition or home improvements, or covering credit card debts — refinancing can allow you to take out equity as cash and repay it as part of your new mortgage.

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When Selling Makes Sense

If you’re thinking about moving or are not particularly tied to your home, selling can benefit your situation in different ways. These are scenarios where selling might make sense.

You have enough equity to buy a new home

If you have a lot of equity in your home and want to downsize or move somewhere cheaper, selling could be the right move. This is especially true if you can afford to buy a different home using cash. For example, if you have $400,000 in equity and want to purchase a $300,000 home, you would be able to sell your current property and buy the new one without a mortgage.

You need cash but don’t want a loan

Selling your home is one way to get cash without having to pay it back. A cash-out refinance lets you borrow against your home’s equity, but selling lets you pocket it all — minus the costs associated with selling.

You’re ready to move

If you’re looking to move, selling your home is an obvious decision. You won’t be living in it anymore and can use the proceeds from the sale to buy a home wherever you move to. Selling is especially advantageous if you’ll be able to buy your next home outright or take out a much smaller mortgage.

You also could consider renting out your current home. This requires a lot of effort, so you should know what you’re getting into before embarking on that path.

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Tips for Selling or Refinancing

If you’re thinking about selling or refinancing your home, here are some useful tips.

Understand how much equity you have in your current home

Whether you’re thinking about refinancing or selling, knowing how much equity you have is important. To explicitly define the term, your equity is the value of your home minus the balance of how much you still owe. The more equity you have, the more cash you can get with a cash-out refinance or by selling.

Investigate current market conditions

Understanding the real estate market is essential before you make any moves. According to Blaine Thiederman, a certified financial planner based in Denver, the best time to sell is when you can make enough from the sale to afford new housing that better suits your lifestyle.

“Your family is happier, you’re closer to things you want to be close to, and you enjoy your life more living in your new home,” he says.

The best time to refinance, according to Thiederman, is when you can reap the financial rewards within three years.

Be sure you’ll make money on a sale

Before you sell your home, make sure that the sale will be profitable.

If property values have dropped, you may owe more than your home is worth. You might not have enough to pay off your mortgage after selling, which means you must repay the remaining balance out of pocket.

Real estate transactions also come with significant closing costs. Generally, if you don’t have enough equity in your home to cover these costs, you could lose money by selling your home. This can happen if you refinance before selling or sell shortly after buying.

Compare your mortgage rate with current interest rates

By refinancing your mortgage, you’ll exchange the interest rate on your existing loan for the rate on a new loan. If market interest rates are higher than your current mortgage rate, you’ll pay more for your loan. But if they’re lower, you stand to save a lot of money on interest.

Check what loans you qualify for

Just because you already have a mortgage, there’s no guarantee that you’ll qualify for a new loan with better terms. This is especially true if your credit score has dropped since you bought your home.

Before you refinance or sell your home to buy a new one, make sure you can qualify for a new mortgage with favorable terms. If you can’t, it’s a good idea to hold off on refinancing or selling your home.

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The Bottom Line on Refinancing or Selling Your Home

Refinancing your mortgage or selling your home are options for people who want to cash out some of their home equity or don’t like the terms of their current mortgage. Once you understand the pros and cons of each, you’ll have a better idea of when it makes sense to take one path or the other, and you’ll be ready to make the best financial move for your situation.