If your current home isn’t meeting your financial and lifestyle needs, you might be deciding to refinance or move to a new home. Refinancing can free up funds for other uses, including renovations, but moving gets you into a home that works for you right away.
Both options have numerous pros and cons, making the decision much more difficult. In this guide, we help you make the “refinance or move” comparison so you can settle on what’s right for you and your family.
Refinancing Pros and Cons
Refinancing involves paying off your old mortgage and assuming a new one with better terms. The most common reasons for refinancing are:
- Getting a lower interest rate or reducing the size of payments.
- Switching from an adjustable-rate mortgage to a variable-rate one or vice versa.
- Accessing home equity.
- Eliminating private mortgage insurance if there’s enough equity in the home.
Refinancing can save hundreds of dollars a month and tens of thousands over the life of the loan. However, it’s not without costs. Most of the same searches and verifications that happen with a new home purchase are also needed for a refinance application, and the fees attached fall to the borrower. Expect to pay 2 – 5% of your new loan amount on closing costs. In the “refinance or move” debate, closing costs don’t tip the balance, since you’ll pay them no matter what decision you make.
Moving Pros and Cons
If refinancing doesn’t address the issues you have with your current home, it’s time to think about moving. You might want more space, or you might be downsizing. Perhaps you want to cut your commute time or move to a different school district.
The main advantage of moving is that you get exactly what you want right from the start. Your space and location requirements will be met right away, and any annoyances you had with your old home will vanish. However, there are costs associated with moving:
- Real estate commissions on the sale of your old home, along with some of the closing costs (depending on negotiations).
- Closing costs on the purchase of your new home.
- Moving expenses.
- Bridge financing or rental expenses if the deals don’t close on the same day.
- Set-up costs in your new home, such as utility installation, new furniture and appliances, and any maintenance or cleaning that’s needed.
Beyond the added expenses, moving is tiring and disruptive to your life. If you have small children, you’ll also face school-related and logistical challenges. When you’re deciding whether to refinance or move, it’s easy to underestimate how difficult moving from one house to another is, even if they’re in the same area.
When It Makes Sense to Refinance
If you’re making the “refinance or move” decision, there are some situations where refinancing is a good idea:
Interest Rates Are Much Lower
If current interest rates are at least 1% lower than your existing rate, and you plan to stay in your home long enough to recover the closing costs through monthly savings, refinancing makes sense financially. For example, refinancing a 6% $300,000 mortgage at 4.5% could save you $275 a month. Assuming closing costs of $6,000, you’d break even in less than two years. After that, it’s all savings.
Your Home Meets Most of Your Needs
If you’re generally satisfied with the size, layout, and location of your home and you just want better loan terms, or you need to take some of the equity out of your home, refinancing can make more sense. You’ll save money (or be able to make improvements), and you won’t have to go through the hassle of a move.
Moving Costs Would Be Too High
If you’ll be paying tens of thousands in real estate commissions and moving costs but refinancing only costs $5000, you’re better off staying put if there’s no compelling reason to leave. Since your commission payment and moving costs will be out of pocket, they’ll reduce the amount you’ll be able to spend on a new house. In the “refinance or move” debate, it’s a good idea to add up the costs of each option.
You Recently Purchased Your Home
If you bought your home in the last one to three years, you haven’t built up a lot of equity. Equity helps you absorb the costs of selling your home and buying a new one, so waiting until you have more equity is a better decision.
You Can Solve Space or Functionality Issues Through Renovations
Sometimes adding space, making layout changes, or finishing a basement or attic is all you need to make your home work for you. If that’s a possibility, refinancing could free up the funds you need. The right changes will also add value to your home, so you’ll recoup some of the costs when you sell. When you’re deciding whether to refinance or move, renovating could provide the answer.
When It Makes Sense to Move
In some cases, moving is the right decision:
Your Home Doesn’t Meet Your Fundamental Needs
In some cases, no amount of renovating will make the home suitable. If your family has grown, you need space for elderly relatives, or you want a single-story layout for mobility reasons, you may not be able to alter your space. When this becomes a serious obstacle to your lifestyle, it’s time to move.
Major Repairs Are on the Horizon
If your home needs expensive repairs and you’re not financially prepared to shoulder the cost, it might make more sense to buy a new place that’s move-in-ready. Moving can also be the better choice if renovating will mean relocating for a long period.
Your Home Has Appreciated Substantially
If your home’s value has increased, you’ll have enough equity in it to absorb the cost of moving. By buying a less expensive home, you’ll have plenty left over for your other needs.
Lifestyle Changes or Needs Are Prompting a Move
Whether you’re getting married or divorced, opening a home business, or you want to live in a different city, moving can be the best decision. Life is short, and you deserve to live it the way you want to, as long as your long-term financial health is sustainable.
Should You Refinance or Move?
In the “refinance or move” debate, there’s no one best option: it depends on your financial and lifestyle needs, your long-term plans, and your tolerance for upheaval. Running the hard numbers can help you stay realistic; do a thorough analysis of the costs involved for both options. Consult with your financial planner and an experienced real estate agent about market cycles, what your house would appraise for, and how much you could get if you sell. By keeping an eye on your long-term financial well-being and your life goals, you’ll make the right decision to refinance or move.
