When Should You Refinance a Mortgage?

You should consider refinancing your home when interest rates fall significantly below your current mortgage rate for potential savings. 

Do you want lower interest rates, a shorter term, and more affordable monthly payments? If yes, mortgage refinancing could be an option. 

If the timing is right, getting a new loan to pay off the existing one decreases the cost of your mortgage. So, when should you refinance a mortgage?

What to Consider Before Refinancing 

Deciding when to refinance depends on various factors, including:

Expected Interest Rates Based on Market Conditions

Interest rates have the biggest influence on monthly mortgage payments. It makes sense to refinance when interest rates are lower than those on your existing mortgage. As a rule of thumb, the interest rate on the new mortgage should be 1% lower.

Loan Term

Mortgage refinancing is also an option when you adjust existing loan terms. Through refinancing, you can increase or decrease the length of time needed to pay your mortgage. Some homeowners may opt for a shorter term to repay the loan faster. Others may opt for a longer term to take advantage of lower interest rates and lighter monthly payments. 

Type of Loan

Your mortgage type can affect your monthly loan payments. If you have an adjustable-rate mortgage (ARM), your payments can increase or decrease based on interest rates. With a mortgage refi, you can switch to a fixed-rate mortgage to lock in loan and monthly payments. 

When Should You Refinance a Mortgage? 

Refinancing replaces your old loan with a new mortgage. Here are some potential scenarios when you should consider refinancing your mortgage. 

Lower Your Interest Rate

If interest rates are falling, refinancing may allow you to benefit from lower rates. For instance, you have a $100,000 loan with a 30-year term, a 7% interest rate, your monthly payment of $665.30. If interest rates decrease to 6%, the total monthly payments will decrease to $599.55. 

Shorten the Term of Your Loan 

If you have a 30-year mortgage and want to pay off the loan faster, you can opt for a 20-year mortgage through refinancing. Your monthly payments will increase, but you may qualify for lower interest rates. By paying off the loan 10 years earlier, the total interest cost will also be lower than the original loan term. 

Choose a Different Type of Home Loan

If you prefer to change your loan type from a fixed-rate to an adjustable-rate mortgage, refinancing could help you tailor your loan type to suit your needs and plans. 

Tap Your Home Equity

If you refinance your home for an amount greater than your existing loan balance, you may be able to get the difference as a cash payment. You can use the amount received from refinancing your mortgage for any purpose, such as making home improvements or buying another property.

Get Rid of Private Mortgage Insurance (PMI)

PMI can cost from 0.2 to 2% a year, and you can eliminate this by refinancing. 

There are generally two ways to cancel the PMI. If interest rates are decreasing and you refinance your mortgage, lenders may cancel the PMI. You also have the option to refinance into a new loan with no PMI requirement.

Switch From an Adjustable-Rate Mortgage to a Fixed-Rate

Suppose you expect interest rates to increase as inflation increases; you may want to apply for refinancing to lock in the interest rate. Suppose your mortgage has an interest rate of 6% and economic forecasts expect the rate to increase to 8%. In this scenario, refinance now and lock in a mortgage at a lower interest rate to decrease the total interest rate on your mortgage. 

Add or Remove a Borrower

Refinancing your mortgage is an option when you need to remove or add a co-borrower. Some homeowners may add borrowers to access lower interest rates or remove borrowers due to some change in their current situation. 

Pay for Large Expenses

Home refinancing lets you tap into your equity. You can get a larger mortgage and receive the difference in cash to cover large payments such as the down payment on a second home or an investment property. 

When Should You Not Refinance Your Mortgage? 

While there are many advantages to refinancing your mortgage, you should avoid doing this in the following circumstances.

Breaking Even Might Take Time

Every time you consider refinancing, you need to calculate the break-even point: the number of months it will take for the closing costs paid to equal the total cost savings from refinancing. If your break-even point is 5 years and you plan to stay in the property for only three years, refinancing may not be a good idea.  

Plan to Sell Your Home Soon

If you plan to sell the mortgaged property soon, mortgage refinancing is not the most cost-effective option. You may not be able to recoup the cost of refinancing.

High Prepayment Penalty on Your Current Mortgage

If your mortgage prepayment penalty is too high, the cost of refinancing will increase. In this case, it may not make financial sense to refinance.

Low Credit Score 

If your credit standing falls, you may not be able to access low-interest rates or better loan terms that will make refinancing worthwhile.

Closing Costs Outweigh the Potential Savings

Refinancing your mortgage comes with closing costs, typically 2% to 5% of your loan amount. These include appraisal fees, loan application fees, and title search fees, among others. Make sure you weigh these closing costs against the potential savings from a lower interest rate to determine if refinancing makes financial sense for you.

How Much Does It Cost to Refinance? 

Refinancing costs usually cost three to 6% of the loan's outstanding principal. Costs for refinancing your mortgage typically include the following:

• Title Search
• Title insurance
• Loan application fee
• Origination fees
• Appraisal fee
• Inspection fee
• Prepayment penalty

How Much Can You Save By Refinancing? 

The total savings from refinancing are unique to each borrower. You can calculate this by comparing your current mortgage with your potential mortgage after refinancing. 

How Soon Can You Refinance a Mortgage? 

Each lender may have a different policy on when you can apply to refinance your mortgage. Most lenders require borrowers to wait at least six months before refinancing a loan. 

Compare the Best Mortgage Refinance Providers From Benzinga’s Top Lenders 

If you're sold on mortgage refi and it's time to shop for lenders, start your search with these lenders.

Find Smarter Ways to Meet Your Financial Goals 

Mortgage refinancing allows one to take advantage of lower refinancing rates that lower monthly payments and potentially a shorter loan term. Although refinancing helps you achieve many financial goals, but it's not always the right choice. Evaluate your home value, credit score, plans to stay in the property and closing costs to assess if refinancing makes financial sense.

Frequently Asked Questions