When Should I Refinance My Mortgage?

Your mortgage is one of the biggest and most important investments you’ll make in your entire life – and it can also help you reach your financial goals. A mortgage refinance can be a wonderful tool to help you reach those goals even sooner. This is a transaction in which you’ll receive a new mortgage to pay off your old mortgage.

But should you refinance your mortgage? When is it the right choice? You can make that decision confidently after understanding the circumstances that call for a refinance.

Why Should I Refinance My Mortgage?

Refinancing can allow you to change the conditions of your mortgage to secure a lower monthly payment, get a new loan repayment term, consolidate debt or even take some cash from your home’s equity to put toward bills or renovations.

Here are some common uses of a mortgage refinance and how it might benefit your needs or financial goals.

1. You Want To Secure A Lower Interest Rate

If rates were particularly high when you took out your original mortgage and they’ve since dropped significantly, you’ll likely be able to refinance to a lower rate. This has the potential to lower your mortgage payment.

Remember that closing costs (if rolled into your refinanced loan), property taxes and insurance could all affect how much you’ll save each month – or if you save any money at all. Closing costs alone can incur up to 6% of the loan amount along with common fees including the origination fee, attorney fee, credit check fee and application fee among others.

Without factoring in taxes and insurance, let’s take a look at how a mortgage rate that’s 1% lower could impact your monthly payment.

Based on this data you could save $157 a month by reducing your rate 1%. Consider these savings over 30 years and you could save $56,520 in interest.

2. You Need To Change Your Loan Repayment Term

A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the loan term and make a lower payment each month.

When you lengthen your mortgage term, you may get a slightly higher mortgage interest rate. Lenders take inflation into account, and a longer mortgage term means you’ll likely pay more in interest over time.

You can also refinance your mortgage in the opposite direction, from a longer-term to a shorter-term mortgage. When you make this switch, you’ll likely have lower interest rates and own 100% of your home sooner. However, this will also make your monthly payments increase.

3. You Need Cash To Pay Off Debts

It’s possible to build home equity in two ways: paying down your loan’s principal balance and the home experiencing an increase in value. Typically, if your loan is more than 5 years old, you’ve probably built a bit of equity in your investment just by making your regularly scheduled monthly payments.

A cash-out refinance allows you to take advantage of the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of the equity you have. If you have higher-interest debts spread over multiple accounts, you can also use a cash-out refinance to consolidate your debts to a lower interest rate, pay off each account and transition to one monthly payment.

4. You Want To Make Home Improvements Or Renovate

From fixing a broken HVAC system to replacing the pink linoleum in the bathroom, you might need to refinance to invest in home improvements at some point or another.

Using home equity can be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have a lower interest rate than both.

5. You Want To Convert An ARM To A Fixed-Rate Mortgage

An adjustable-rate mortgage (ARM) generally offers borrowers a lower interest rate at the beginning of the loan. But after a fixed period (usually 5, 7 or 10 years), the interest rate has the potential to fluctuate – and not always in the borrower’s favor. For this reason, some homeowners will opt to refinance their ARM to a fixed-rate mortgage, which eliminates this fluctuation in interest rate.

It’s also possible to refinance a fixed-rate mortgage to an ARM. This involves some risk, but it could be a smart option if interest rates are falling. Or it may be wise if you plan to sell your home before the initial period of fixed (generally lower) interest ends.

Should I Refinance My Home? 4 Steps To Help You Decide

Here are four variables to help you decide if you should refinance your mortgage.

1. Understand Mortgage Refinancing

Take the time to thoroughly understand what a mortgage refinance is and how it works. This will help ensure you don’t encounter surprises along the way.

Refinancing comes with pros and cons, like closing costs, so take these into account when deciding whether a refi is right for you, particularly if you’re planning to sell in the near future.

Walk through all the finer details. Is your mortgage rate under 5%? Has your credit score dropped? Does your mortgage have a prepayment penalty? All of these are good reasons to reconsider pursuing a refinance.

2. Consider Your Short- And Long-Term Goals

Your short- and long-term goals are important in deciding whether refinancing is a good idea. Ask yourself if you’re refinancing for the right reasons. If you’re going to refinance to splurge on discretionary purchases, that’s probably not a wise move.

Think carefully about what the future holds. Do you plan to sell your home or make any other large investments in the next 5 – 10 years? Among other factors, this will impact whether the cost to refinance your mortgage is worth it.

3. Use A Mortgage Refinance Calculator

To get a basic idea of how a refinance could affect your monthly mortgage payment, use a refinance calculator.

Simply input some basic information about your goals, current mortgage, where you’re located and your credit score. You’ll instantly be able to calculate what your refinance payment could look like.

4. Calculate Your Break-Even Point

After using a refinance calculator to see how much you’ll save on your mortgage payments each month, you can calculate your break-even point to see if it makes financial sense to refinance.

Let’s say you save $200 a month by refinancing and your closing costs are $18,000. Divide your closing costs by your monthly savings ($18,000 divided by $200), and you’ll see it should take 90 months – or 7.5 years – to break even.

This may seem like a long time, but if you’re planning to stay in the home longer than 7.5 years, you’ll end up saving money. If you don’t intend to stay this long, however, it probably wouldn’t be wise to refinance. That’s because you’ll end up spending more money on refinancing than you save.

Refinance Alternatives To Consider

Refinancing is a personal decision, but it’s important to note that it might not even be necessary. There are plenty of other options to consider as alternatives.

For example, if you want to save money, you can cut down on interest charges by paying extra on your payments each month.

If you want to tap into your home equity, particularly for home improvement projects, you might consider a HELOC (home equity line or credit) or a home equity loan.

The Bottom Line: Consider All The Factors Before Refinancing

If you are wondering if you should refinance your home there is no clear-cut answer. Nor is there a definitive time when to refinance your home. Everyone’s situation is different, but a refinance can be a worthwhile financial endeavor for some homeowners.

Before moving forward, take the time to find the right mortgage refinancing option for your specific situation – if you’ve determined that a refinance is the way to go.

Ready to get started with refinancing or with a brand-new mortgage? Start the approval process today with Rocket Mortgage^®.