Refinancing: When Does It Make Sense?

Refinancing your mortgage means replacing your existing home loan with a new one. Homeowners may refinance for a variety of reasons, from changing their interest rate or monthly payment to accessing equity they’ve built in their home. But refinancing isn’t automatically beneficial just because rates have changed. The right time to refinance depends on your current mortgage, your financial goals, the costs of a new loan, and how long you expect to remain in your home.

So, when might refinancing make sense?

There’s no single interest rate or formula that determines whether refinancing is worthwhile. Instead, consider several factors together.

• Your current interest rate compared with available rates

  If the rate available on a new mortgage is meaningfully different from the rate on your current loan, refinancing may be worth exploring. However, the potential benefit depends on the size of the difference, your remaining loan balance, the new loan terms, and the costs associated with refinancing.

• The cost of refinancing

  Refinancing typically involves many of the same types of costs associated with getting a mortgage, such as lender fees, appraisal costs, and other closing costs. One helpful way to think about the decision is to compare the cost of refinancing with the potential monthly savings. For example, if refinancing costs $10,000 and reduces your monthly principal and interest payment by $200, it would take approximately 50 months to recover those costs through monthly savings. This is referred to as the break-even point.

• How long you plan to stay in your home

  If you expect to stay in your home and keep the new mortgage beyond the break-even point, you’ll have more time to benefit from the monthly savings. If you expect to move before reaching the break-even point, you will not have recouped the cost to refinance.  However, if your goal is to reduce your monthly housing expenses, you may decide that lowering your payment is a priority even if you don’t expect to stay in the home beyond the break-even point. It depends on what you’re hoping to accomplish by refinancing.

• Your current financial situation and ability to qualify

  Your financial picture may have changed since you originally purchased your home. Refinancing means applying for a new mortgage, so just like when you purchased your home, you’ll need to meet the lender’s qualification requirements. They would consider factors such as your income, credit history, existing debts, assets, and the amount of equity in your home when evaluating you for a new mortgage. That means being “mortgage ready” matters even after you’ve purchased a home. Read here to learn more about becoming mortgage ready.

The bottom line

Refinancing isn’t simply about getting a lower interest rate. It’s about determining whether replacing your existing mortgage with a new one makes sense for your circumstances and financial goals.

If you’re considering refinancing, our lending team can help you understand your refinancing options and what may make sense for your situation.