When Should You Refinance Your Mortgage?

Should you refinance your mortgage? It’s a question that many homeowners ask themselves, especially when interest rates are low Refinancing can potentially save you money on your monthly mortgage payment or on total interest over the life of your home loan. But it’s not always the right decision

Here’s a breakdown of when refinancing might make sense and when it might not:

When to Refinance:

• Mortgage rates have gone down. If mortgage rates have fallen since you took out your original mortgage, you may be able to save money by refinancing to a lower rate.
• Your credit has improved. Your credit score is a major factor in determining your mortgage rate. If your credit has improved since you took out your original mortgage, you may be able to qualify for a lower rate by refinancing.
• You want a shorter loan term. If you’re keen to pay off debt, you may want to refinance your mortgage to a shorter loan term. This can save you money on interest in the long run, but it will also increase your monthly payment.
• Your home value has increased. If the value of your home has gone up, you may be able to get a cash-out refinance. This allows you to take out a new mortgage that’s larger than what you previously owed, and you receive the difference in cash.
• You want to convert from an adjustable rate to fixed. If you have an adjustable-rate mortgage (ARM), you may want to consider refinancing to a fixed-rate mortgage. This can provide you with some peace of mind, as your interest rate will no longer fluctuate.

When Not to Refinance:

• You have a prepayment penalty. If your existing mortgage has a prepayment penalty, you may not want to refinance. The penalty could outweigh any savings you would get from refinancing.
• You’re moving soon. If you’re planning to move in the near future, it may not be worth it to refinance. You may not have enough time to recoup the costs of refinancing.
• You have an existing home equity loan. If you have a home equity loan or line of credit, you may need to pay it off before you can refinance your mortgage.
• Your refinancing fees are too expensive. Refinancing can be expensive. Make sure you know what costs to expect and whether you can afford them.
• You’re almost done paying off your mortgage. If you’re close to paying off your mortgage, it may not make sense to refinance. You’ll start over with a new loan, and you may end up paying more in interest.

Here are some additional things to consider when deciding whether to refinance:

• How long do you plan to stay in your home? If you plan to stay in your home for a long time, you’re more likely to recoup the costs of refinancing.
• How much equity do you have in your home? The more equity you have, the more likely you are to qualify for a good refinance rate.
• What are your financial goals? Are you trying to save money on your monthly mortgage payment? Are you trying to pay off debt faster? Are you looking to access cash from your home equity? Your financial goals will help you determine whether refinancing is the right decision for you.

It is wise to speak with a mortgage lender if you are considering refinancing your mortgage. They can assist you in weighing your options and deciding if refinancing is the best course of action for you.

Is It Worth It to Refinance for 1%?

As a rule of thumb, it’s usually worth it to refinance if you could lower your current rate by one percent. One percentage point is a significant rate drop, and it should generate meaningful monthly savings in most cases.

For example, dropping your mortgage rate a percent — from 6. 5% to 5. 5% — could save you $257 per month on a $400,000 loan. That’s nearly a 20% reduction in your monthly mortgage payment.

Those monthly savings can be put toward daily living expenses, emergency funds, investments, or paid back into your mortgage to pay the loan off early and save you even more money in interest

Here’s an example when refinancing is worth the expense:

• Loan Balance: $400,000
• Current Interest Rate: 6.5%
• New Interest Rate: 5.5% (-1%)
• Monthly Savings: $257
• Closing Costs: $8,000 (2%)
• Time to Break Even: 31 months (2.6 years)
• Worth It? Yes, if you keep the loan ~2.6 years or longer

Keep in mind, “breaking even” with your closing costs isn’t the only way to determine if a refinance is worth it.

A homeowner who plans to move or refinance again before the break-even point might opt for either:

• A no-closing-cost refinance entails paying a slightly higher interest rate in exchange for the mortgage lender paying all or part of your closing costs. Accepting this higher rate will eat into your monthly savings. But this tactic can still be beneficial if your savings are greater than your current mortgage loan.

• Rolling the closing costs into the refinance loan: This will increase your principal balance and total interest paid. But if you’re going to keep the loan for more than a few years, rolling closing costs into the loan amount may be more affordable than accepting a no-closing-cost loan with a higher interest rate.

“Most borrowers choose the latter— lumping the closing costs into the loan so they can receive the lowest possible rate. But that’s not always the best option unless you plan to stay in your home for at least several years,” says Tom Furey, co-founder of Neat Capital.

Is It Worth It to Refinance for 0.5%?

There are two common scenarios when it could be worth it to refinance for half a percent reduction.

1. If you’ll keep the new home loan long enough to recoup closing costs (breaking even) OR, if you can get the mortgage lender to cover your closing costs with a no-cost refinance loan.

2. If you can drop your mortgage interest rate by 0.5% using a no-closing-cost refinance.

Here’s a look at how the numbers compare if you can drop your mortgage interest rate by 0.5% using a no-closing-cost refinance:

• Loan Balance: $400,000
• Current Interest Rate: 6.75%
• New Interest Rate: 6.25% (-0.5%)
• Monthly Savings: $122
• Closing Costs: $0
• Time to Break Even: N/A
• Worth It? Yes, if you cannot pay closing costs out of pocket

Of course, you would save a lot more money both month-to-month and in the long run if you accepted the lower mortgage rate and paid closing costs upfront.

Those who can easily pay the closing costs out of pocket should typically do so.

But for homeowners without a lot of savings, accepting a slightly higher interest rate in exchange for no closing costs can still be a good deal.

Ultimately, the decision of whether or not to refinance is a personal one. There are many factors to consider, and the best decision for you will depend on your individual circumstances.

If you’re thinking about refinancing, it’s a good idea to talk to a mortgage lender. They can help you understand your options and determine whether refinancing is right for you.