Should I Refinance My Mortgage?
Whether you should refinance your mortgage depends on the rates and terms of your current loan, your financial situation and your goals. While refinancing can be a useful tool to take advantage of low interest rates, there’s more to consider than rates alone. You’ll need to determine whether the fees and closing costs are worth the savings you may get on your monthly payments. We’ll cover the when, why and how of refinancing to help you make the right decision.
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What is a mortgage refinance?
Refinancing a home means taking out a new loan that will pay off your current mortgage. Ideally, the refinancing option you choose will offer a lower rate and terms that can save you money over the life of the loan.
When should you refinance your mortgage?
You might be wondering, “Should I refinance my mortgage?” Remember that refinancing makes sense if you can replace your current mortgage with a new home loan that provides a financial benefit. This could look like reduced interest costs, lower monthly payments or getting out of costly private mortgage insurance (PMI) payments.
The following examples can help you decide whether to move forward with a refinance.
1. You want to reduce your interest rate
It’s likely worthwhile to refinance if you can reduce your interest rate by at least 1%. The calculator below can help you determine how much a refinance can save you:
2. You can quickly recover refinancing costs
A more affordable monthly mortgage payment is a great motivator to refinance, but any savings you’re hoping for won’t begin until you’ve recouped your refinance closing costs. Once you’ve saved enough to cover the closing costs, you’ve reached your “break-even point” (more on this later). Before this point, you may be enjoying lower monthly payments but aren’t actually saving.
You can calculate how long it will take to recover your closing costs by dividing your total costs by your monthly savings. Or, you can let our mortgage refinance calculator do the math for you. It can also help you estimate your payoff time and total costs.
A no-closing-cost refinance is a way to avoid draining your savings to pay for a refinance. With this type of loan, you won’t need to bring a ton of cash to the closing table. Instead, you can finance your closing costs by either rolling them into your new loan or by having your lender bump up your interest rate.
3. You want to get rid of PMI
You may be able to lower or even eliminate PMI by refinancing your loan. If your home’s value has increased since you took out your mortgage, you can borrow a new loan at a lower loan-to-value (LTV) ratio. If you can get that LTV below 80%, you can ditch expensive PMI payments for good.
4. You want to switch your FHA loan to a conventional loan
Refinancing from an FHA to a conventional loan could save you big bucks by getting rid of your FHA mortgage insurance premiums (MIP). If you made a 3.5% down payment on an FHA loan when you bought your home, you’re stuck making MIP payments for the life of your loan.
5. You’re ready to pay off your loan faster
The shorter term of a 15-year fixed-rate mortgage is a faster and more cost-effective path to owning a mortgage-free home — as long as you have room in your budget for the higher monthly payment.
6. You want to replace an ARM with a fixed-rate mortgage
Adjustable-rate mortgages (ARMs) are growing in popularity, but they aren’t for everyone. Whether you have an ARM that’s about to adjust, or you simply prefer the predictability of monthly payments that don’t change, it can be worth it to refinance your ARM with a fixed-rate loan.
7. You want to use your home equity to access cash
A cash-out refinance will give you access to a large payout that could make all the difference in your financial life. By replacing your current loan with a larger one (and pocketing the difference), you can wipe out credit card balances, beef up your emergency fund or dive into some much-needed home improvements.
Most cash-out refinance lenders will cap you at an 80% LTV ratio, which means you need to keep at least 20% equity in your home after refinancing. This puts a limit on how much cash you can access and ensures that you’ll have some equity in your home no matter what. If you have to sell your home quickly, for example, you’ll still be able to pocket some of the profit.
You can use our cash-out refinance calculator to determine if refinancing makes sense for you right now.
Reasons not to refinance your home
You can’t afford the closing costs, and financing them into the loan will eat into the savings you were expecting to get out of the refinance.
You won’t be able to reduce your interest rate by enough to make a significant dent in your mortgage payment.
You won’t yet be able to get rid of PMI.
You want to tap your home’s equity for nonessential expenses that won’t raise your home’s value and aren’t essential.
Timing for refinancing a home: What to consider
It pays to consider both the financial benefits of a refinance and whether the timing is right. Here are the three most important steps you need to take before leaping into a refi.
1. Analyze your current situation
- How long are you planning to stay in this home?
The sooner you’re planning to sell, the less time you’ll have to recoup your refinance costs.
- How long have you been paying your existing mortgage?
Most homeowners are counting down the years until they’ll own their home outright, but a refinance resets that clock. A new loan means a new amortization schedule and, in many cases, additional years of paying interest. It may not make sense to start over if you’re already close to paying off your loan.
- How does the broader rates environment look?
It typically makes the most sense to refinance when interest rates are dropping so that you can lock in a new, lower rate. That said, if your credit score or home value has recently jumped, you might still benefit from a refinance even in a tough market.
2. Calculate your refinance break-even point
Calculating the break-even point on a refinance is a good way to determine if a refinance is worthwhile. For example, if you can save $100 a month with a refinance that comes with $2,000 in closing costs, you’ll recoup your costs in 20 months — just under two years.
If you plan to keep your home for at least that long, the refinance makes financial sense. You might even consider paying mortgage points for a lower rate if you’re living in your forever home. The long-term interest savings could pay off despite the longer break-even timeline.
Need help? Try using LendingTree’s refinance calculator to find your break-even point.
3. Know how soon you can refinance a mortgage
How quickly you can refinance after taking out your mortgage will vary depending on the exact type of loan you have. Some loan types come with mandatory waiting periods also known as “seasoning requirements.”
How often can I refinance my home?
There’s no limit on how many times you can refinance. But the closing costs and waiting period can both contribute to a practical limit on how often you can feasibly refinance.
How to lower your mortgage payment without refinancing
If you have extra cash
Consider a mortgage recast if you’re willing to put a lump sum of cash towards your principal mortgage balance all at once. After this large, one-time payment your lender will recalculate your monthly payments based on the new loan balance. This will result in lower payments going forward — all without the hassle or closing costs of a refinance.
If you’re struggling to manage your mortgage
Getting approved for a refinance loan may not be possible if you’ve made late mortgage payments recently or you’re behind on your mortgage. Here’s what you can do to make your payments more manageable without refinancing:
- Contact your servicer. Your mortgage payment statement should have contact information. Call and talk to a representative about your options for relief from unmanageable payments.
- Document your hardship. Lenders will typically send you a form to complete that outlines your monthly expenses and income. Submit the requested information and follow up on the status frequently.
- Request forbearance. In certain situations, lenders may allow you to stop making payments for a set period of time if you request a mortgage forbearance. Be sure you understand what happens to the interest that accrues during forbearance and how your monthly payments will be affected after the forbearance period ends.
Remember, taking action quickly can help delay or prevent a potential foreclosure.