When Should I Refinance My Mortgage?

For most homeowners, monthly mortgage payments probably make up the most considerable expense on the list of monthly financial responsibilities. But now, with mortgage rates at an all-time low, you might be able to make those monthly payments smaller by refinancing your mortgage.

For borrowers with solid credit histories, refinancing can help you lock in a lower interest rate and help you save money on your monthly mortgage payments.

But you may be asking yourself, just how low will my interest be if I refinance? Historically, when considering refinancing your mortgage, the rule of thumb dictates that it's best to consider refinancing when you can lower your interest by at least 2%. However, even a slightly lower interest rate can equal massive savings over the life of the loan and can add up to a considerable amount over the life of the mortgage.

Because of daily market fluctuations, your refinanced interest rate will depend on several factors, including:

• Your credit score
• Your home’s location and the value of similar homes in your neighborhood
• The current appraised value of your home
• The lender you choose

Refinancing to a lower interest rate will not only save you money but will also help you build equity in your home much faster. However, the math isn’t as simple as comparing your current interest rate to the lower one that you may qualify for now.

You need to ask yourself these key questions to determine if this is the right time to refinance your mortgage.

1. How much will I save over the life of the loan?

The interest rate is not the only factor you should consider when you are thinking about refinancing. When you refinance, you're essentially trading in your old mortgage for a new one, and there will be fees like closing costs associated with the new loan.

Some lenders allow you to roll over the closing costs into the balance of your refinanced loan and expense it as part of the loan’s total. It’s important to consider what your new monthly payments will be and whether you’ll actually be saving money in the long run before signing on the dotted line.

2. Do you plan on moving soon?

If you plan on selling your home soon, it’s a good idea to hold off on refinancing. Selling too soon after refinancing means you won’t be able to enjoy the benefits of the lower interest rate.

For example: if your closing costs are around $7,000 and your monthly savings are $150, it will take you 45 months to recoup the amount you spent in closing costs before you start accruing the savings benefits.

3. How long have you had your mortgage?

Refinancing your home means you are taking on a new mortgage with a new loan term. If you've had your mortgage for more than ten years, refinancing means you might end up paying more for the house overall, even with a considerably lower monthly mortgage payment.

If you are trying to pay off your loan sooner, it’s best not to refinance. Refinancing will increase the length of the loan and may take longer to repay since the interest is front-loaded into your initial refinanced mortgage payments.

4. Do you want to change your loan type?

If you currently have an adjustable-rate mortgage that’s approaching a change of terms, then refinancing could be the right choice for you. Switching to a fixed-rate mortgage may save you money in the long run since the rate is not variable, and the interest and payments will not change over the loan's lifetime.

This is also the case if you have an FHA loan that requires you to pay Private Mortgage Insurance (PMI). Refinancing can mean you’ll pay off the original mortgage and get a new one that doesn’t add monthly PMI fees.

5. Are you in the right position to refinance?

Refinancing your mortgage can be a great financial move for some people, especially when you get a lower interest rate and shorten the term of your loan. To determine if it's the right time to refinance and if this option is right for you, it's crucial to consider your financial health in addition to the current market conditions.

You’ll know it’s right to refinance when:

• You’ve built a good amount of equity in your home
• You have enough equity to get rid of mortgage insurance
• You want and are able to tap into your home’s equity with a cash-out refinance