When Does Refinancing Make Sense?

Refinancing isn't only about getting a lower rate. The right decision depends on your current mortgage, your goals, the costs involved, and how long you plan to stay in your home.

By Sandy Biondo | Consolidated Lenders Group

If you already own a home, you've probably heard people talk about refinancing when mortgage rates change.

But a lower rate doesn't automatically mean you should refinance.

A refinance replaces your existing mortgage with a new loan. That means you'll have a new interest rate, loan term, monthly payment and closing costs to consider.

The better question isn't simply:

“Are rates lower?”

It's:

“Would refinancing my current mortgage help me accomplish something worthwhile?”

Here are some of the situations when it may be worth taking a closer look.

1. You May Be Able to Lower Your Interest Rate

One of the most common reasons homeowners consider refinancing is the possibility of obtaining a lower interest rate.

A lower rate may reduce your monthly principal-and-interest payment and potentially reduce the amount of interest you pay over time.

But there's no single rate drop that automatically makes refinancing worthwhile for everyone. Your current balance, new loan terms, closing costs and how long you expect to keep the mortgage all matter.

SANDY'S TIP

Don't look at the interest rate by itself. Compare the new payment, closing costs, loan term and how long you expect to keep the home before deciding whether a refinance makes sense.

2. You Want to Lower Your Monthly Payment

For some homeowners, the goal isn't necessarily to pay off the mortgage faster. It's to create more room in the monthly budget.

A refinance could potentially lower your payment through a lower interest rate, a different loan term, or a combination of the two.

However, there's an important tradeoff to understand.

If your payment decreases because you're extending the mortgage over a longer period, you could end up paying interest for more years. The CFPB specifically recommends looking at how much of a payment reduction comes from a lower rate versus simply extending the loan term.

A lower payment is valuable—but it's important to understand what you're giving up to get it.

3. You Want to Change Your Loan Term

Refinancing can also be an opportunity to change how long you have to repay your mortgage.

For example, a homeowner may want to move from a longer-term mortgage into a shorter-term loan.

The monthly payment could be higher, but depending on the new loan's terms, a shorter repayment period may allow the homeowner to build equity faster and reduce the amount of time spent paying interest.

On the other hand, refinancing into another long-term mortgage after you've already spent years paying your current loan could extend your repayment timeline.

That's why it's important to compare the remaining term on your existing mortgage with the term of the proposed new loan—not just compare the monthly payments.

4. You Want More Predictability in Your Mortgage

If you currently have an adjustable-rate mortgage, or ARM, refinancing into a fixed-rate mortgage may be worth exploring.

A fixed-rate mortgage can provide more predictable principal-and-interest payments because the interest rate doesn't adjust with the market.

This can be particularly appealing if your adjustable rate is approaching an adjustment or you simply prefer knowing what your mortgage payment structure will look like going forward.

5. You Want to Access Some of Your Home Equity

As homeowners make mortgage payments and home values change, they may build equity in their homes.

A cash-out refinance is one way a homeowner may be able to access a portion of that equity. The new mortgage is larger than the amount needed to pay off the existing mortgage, with the difference generally provided to the homeowner.

But this deserves careful consideration.

You're converting some of your home equity into new debt secured by your home. A cash-out refinance can also replace an attractive existing mortgage rate with a different rate on the entire new loan balance.

The CFPB cautions homeowners to compare those costs carefully, particularly when using mortgage debt to pay other debts.

Accessing equity can be useful, but it should be considered as part of your overall financial picture.

Don't Forget the Cost of Refinancing

Refinancing isn't free.

Because you're replacing your existing mortgage with a new one, you can encounter many of the same types of costs you encountered when obtaining your original mortgage.

That's why a refinance that lowers your payment isn't necessarily an immediate savings.

One helpful calculation is your break-even point:

Refinancing costs ÷ monthly savings = approximate number of months to recover those costs

For example, if it takes three years for your monthly savings to offset the cost of refinancing but you expect to sell the home in two years, refinancing may not make financial sense based on those savings alone.

How Long Do You Plan to Stay in Your Home?

This is one of the most important questions to consider.

If you're planning to sell or move relatively soon, you may not have enough time to recover the costs associated with refinancing.

If you expect to remain in the home for many years, you may have more time for potential monthly savings to outweigh those upfront costs.

Look at the Whole Picture

When considering a refinance, don't compare only your old rate with a new one.

Consider your:

Current interest rate • Remaining loan balance • Remaining loan term • New interest rate • New loan term • Monthly payment • Closing costs • Long-term plans

The CFPB recommends using the Loan Estimate to understand the features and costs of a proposed refinance.

Sometimes refinancing can make sense.

Sometimes keeping the mortgage you already have is the better choice.

The important part is understanding the difference.

Not Sure Whether Refinancing Makes Sense for You?

You don't have to try to figure it out from an online calculator alone.

Sandy can help you look at your existing mortgage, discuss what you're hoping to accomplish, and review available options so you can better understand whether refinancing may make sense for your situation.

Sometimes the best answer is to refinance. Sometimes it's to keep the loan you already have. The first step is simply understanding your options.

Every borrower's situation is different. Loan programs, rates, terms, eligibility requirements and costs vary. Refinancing may increase the total finance charge over the life of the loan. This information is provided for general educational purposes and is not a commitment to lend.