Most borrowers aim to refinance their mortgage when the refinance rate drops, but there may be other cases where they will exchange their mortgage. Here’s how to figure out when Refi can make sense for you and how you might be better off considering other options:
When should I refinance my house?
For many borrowers, refinancing is best if you can plan to lower interest rates and stay in a home long enough to recover the cost of refinancing closing costs.
Bill Packer, Chief Operating Officer at Reverse Mortgage Lender Long Bridge Financial, outlines a set of factors to consider.
- Monthly savings after tax (new payments compared to old payments after taxable treatment)
- Time you intend to stay at home
- Costs to get a new mortgage
Once you know these three things, you can calculate the return and see if it’s positive, Packer says.
Example: When to refinance your mortgage
Let’s say you took your 30-year mortgage at a fixed rate of 6.23% for $320,000. The monthly payment totals $1,966, which means you will pay $707,808, including $387,808 for the life of the loan.
After five years, the fee will drop to 5.82%. At that point, the original loan has $299,842 left. If you refinance on another 30-year loan at that low rate, your monthly payments total a saving of $1,763, or about $200. Over the lifespan of the loan, you can pay $334,893 interest and save $53,000.
| Current mortgage | New home loan | |
|---|---|---|
| Monthly payment | $1,966 | $1,763 |
| interest rate | 6.23% | 5.82% |
| Total interest | $387,808 | $334,893 |
| Save money | $0 | $53,000 |
The amount you can save from refinancing depends on several factors beyond the rate, including the cost of closing and whether you chose to refinance to suit your needs.
You won’t start realizing your savings until you reach the break-even point. That’s when the amount you save exceeds the closing costs.
Using the above scenario, the refinance closure totals $6,000. To determine your break-even point, save on closure costs every month and save on new payments.
If you are not planning on staying in your home that long, refinance may be pointless.
Why refinance your mortgage
Here are the main reasons to consider refinancing:
Lower interest rates
If your mortgage fees have dropped since you first got your mortgage, refinancing fees and term can provide you with a lower fee (assuming you are eligible). Ideally, the rate should be between three-quarters to three-quarters of points lower than the current rate.
Also, if your credit score improves since taking out your current loan, you can qualify for a better interest rate. The highest rate is sent to people with a score of at least 780.
Shorten the loan period
Refinancing also reduces the time it takes to repay your loan. For example, if you have a 30-year mortgage, you may want to refinance yourself with a new 15-year mortgage. Ideally, you could reduce your lower interest rates and monthly payments with a new loan, but that depends on the general interest rate and remaining loan balance.
Change the rate structure
In addition to lowering fees or reducing term periods, some borrowers are refinancing from adjustable mortgages (ARMs) to fixed-rate loans. The former could help ease your budget by receiving fixed monthly payments from monthly payments for various fees. On the back, switching a fixed-rate loan to your arm may allow you to temporarily cut your payments until your fees are adjusted.
Pay a large amount of money
You can refinance your cash out and tap on the home capital to make money straight away. You can use these funds for the following purposes:
- Lower or repay high profit debt
- I will renovate your home
- Pay university tuition fees
- Investing in real estate
Eliminate private mortgage insurance (PMI)
If you have a traditional loan and your home is on the rise, you can refinance to get out of your private mortgage insurance (PMI) payments, or at least early on.
When you don’t refinance
Refinance may not be the best option. In general, refinancing may not be wise for any of these reasons.
- You will pay more interest. If your typical rate is higher than your current rate, or if today’s credit and finances mean you don’t qualify for a lower rate, it may not make sense to pay more on a new loan.
- You will soon be selling your home. If you sell it right away, you rarely have a home long enough to collect your refinance costs.
- I plan to use my savings for discretionary spending. Don’t fall into the trap of putting your home on the line to spend one-off expenses like a vacation or car. In general, it’s better to save on these costs.
- You’re much more lined up on your mortgage. If you are already in the middle of the loan term, you may not be able to save money by refinancing. You have already reached the point where many of your payments lend you the principal rather than interest. Refinance means restarting the watch and paying more towards interest again.
Is refinance worth it?
Refinancing is worth the work and money if it helps you free up money on a monthly budget, reduce the overall cost of your loan, or achieve other financial goals.
“It’s important to determine your break-even point,” says Linda Bell, senior writer at Bankrate. “Remember, the cost of refinancing is just as costly as a regular mortgage. The goal may be shorter loan terms or lower interest rates, but if you are planning on selling your home in a few years, that may not make any sense economically. Make sure the benefits outweigh the costs.”
