When Does Refinancing Make Sense?

Refinancing means replacing your current mortgage with a new one. It can lower your payment, change your loan term, remove mortgage insurance or give you access to equity. But it also has costs, and it doesn't always make sense even when rates drop.

Common reasons to refinance

Lower your rate or payment

If rates have fallen since you got your loan, or your credit has improved, a new loan at a lower rate could reduce your monthly payment.

Change your term

Moving from a 30-year to a 15-year loan can save significant interest over time, but raises your monthly payment. Going the other way can lower your payment, but extends how long you'll be paying.

Switch from an adjustable to a fixed rate

If your ARM is nearing its adjustment period and you'd rather have predictability, refinancing into a fixed rate is one option. See adjustable vs. fixed.

Remove mortgage insurance

FHA loans often carry mortgage insurance for many years. Once you have enough equity, refinancing into a conventional loan may remove it. See understanding mortgage insurance.

Access equity

A cash-out refinance lets you borrow against your equity for renovations, debt consolidation or other goals.

Remove a co-borrower

After a divorce or other life change, refinancing can take someone off the loan, subject to qualifying on your own.

The costs

A refinance has closing costs similar to a purchase: lender fees, appraisal, title, escrow and recording. You can pay them upfront, roll them into the loan, or accept a slightly higher rate in exchange for lender credits. Each choice has a cost.

The break-even calculation

Break-even (months) = total refinance costs ÷ monthly savings

An example

These numbers are for illustration only. Suppose refinancing costs $6,000, and lowers your principal and interest payment by $250 a month.

$6,000 ÷ $250 = 24 months

If you'll keep the new loan longer than two years, the refinance may save money. If you might move sooner, it may not.

Look beyond the monthly payment

Lowering your payment by extending your loan term can increase the total interest you pay. If you're 7 years into a 30-year loan and refinance into a new 30-year loan, you've added 7 years of payments. Options include:

• Choosing a shorter term, like 20 or 25 years, if available
• Continuing to pay your old payment amount on the new loan to pay it off sooner

When refinancing may not make sense

• You're planning to move before reaching the break-even point
• The savings are small compared to the costs
• Your credit or income has changed in ways that make qualifying harder
• Your home's value has dropped, limiting your equity
• You'd be resetting a loan that's close to being paid off

Qualifying again

A refinance is a new loan. You'll need to qualify based on current credit, income, assets and the home's value. Nothing about your existing loan guarantees approval or a particular rate.

Questions?

If you'd like me to look at whether a refinance makes sense for your loan, contact me and send me your current mortgage statement. I'll give you an honest answer, including if the timing isn't right. You can also start an application or read my refinancing overview.