When should I refinance my mortgage?

Refinancing your mortgage might make sense if you want to accomplish a specific goal. Some homeowners might refinance to lock in a lower interest rate or borrow their home equity. Others might refinance to change their mortgage terms, like extending their repayment timeline or switching to a fixed-rate mortgage. But refinancing isn’t the right fit for everyone.

Reasons to refinance your mortgage

Refinancing can allow you to change the conditions of your mortgage to secure a lower monthly payment, get a new loan repayment term, consolidate debt, or even take some cash from your home’s equity to put toward bills or renovations.

Here are some common uses of a mortgage refinance and how it might benefit your needs or financial goals.

1. You want to secure a lower interest rate

Mortgage rates fluctuate throughout the years. If you originally took out your mortgage during a period of high interest rates, refinancing during a period of low interest rates could lead to significant savings. Not only could a lower interest rate lead to a lower monthly payment, but it can also help you save on interest charges over time.

Without factoring in taxes and insurance, let’s take a look at how a mortgage rate that’s 1% lower could affect our monthly payment.

Based on this data, you could save $157 a month by reducing your rate by 1%. Consider these savings over 30 years and you could save $56,520 in interest. Please keep in mind that you will have to pay closing costs, property taxes, and insurance. Be sure to discuss any refinancing requirements with your lender before you make your decision.

2. You want to change your monthly payment or loan terms

A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan or vice versa. Depending on the option you choose, it could lower or raise your monthly payment and interest rates.

As you weigh your options, decide on what you value most. For example, if you want the breathing room that comes with a lower monthly payment, move forward with that in mind. But if you want to pay off your mortgage as soon as possible, taking on a higher monthly payment over a shorter timeframe might work best. Consider the amount of interest you’ll pay and your financial goals before choosing the term of your refinanced loan.

3. You need cash to pay off debts

A cash-out refinance allows you borrow the equity you have in your home by repaying your current loan with a higher-value loan and keeping the difference. If you have higher-interest debts spread over multiple accounts, you can use a cash-out refinance to consolidate your debts to a lower interest rate, pay off each account, and transition to one monthly payment.

4. You want to make home improvements or renovate

From fixing a broken HVAC system to replacing the pink linoleum in the bathroom, you might need to refinance to invest in home improvements at some point. Using home equity may be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have a lower interest rate than both.

5. You want to convert an ARM to a fixed-rate mortgage

An adjustable-rate mortgage generally offers borrowers a lower interest rate at the beginning of the loan. But after a fixed period (usually 5, 7, or 10 years), the interest rate will adjust – and not always in the borrower’s favor. For this reason, some homeowners refinance their ARM to a fixed-rate mortgage, which eliminates this fluctuation in interest rate.

It’s also possible to refinance a fixed-rate mortgage to an ARM. This involves some risk, but it could be a smart option if interest rates are falling. Or it may be wise if you plan to sell your home before the initial lower interest rate expires.

6. You want to finance your family’s educational goals

Tapping into your home equity through a refinance could offer a cost-effective way to pay for education expenses. For example, you could pursue a cash-out refinance to lean on your home equity as you pay for your child’s college education. Depending on the situation, this solution may offer a lower interest rate than available student loan options.

Before pursuing this course of action, take a serious look at your financial future. Although helping your family pay for college is admirable, it might not be feasible if pursuing a cash-out refinance upsets your own financial stability. For example, this could push retirement further down the road.

4 ways to help you decide if you should refinance

Deciding whether to refinance your mortgage is a significant decision. As you weigh your options, work through these variables to help you make the right choice for your unique situation.

1. Understand mortgage refinancing

Take the time to understand what a mortgage refinance is and how it works. This will help ensure you don’t encounter surprises along the way. Refinancing comes with pros and cons, like closing costs, so take these into account when deciding whether a refi is right for you, particularly if you’re planning to sell in the near future.

With a solid understanding of refinancing under your belt, take a closer look at the details of your current mortgage. As you read through the fine print, look for where you might want to improve the situation. For example, you might focus on getting a lower interest rate or locking in a lower monthly payment. With a better idea of what you want out of a refinance, it’s likely you’ll experience a smoother journey.

2. Consider your short- and long-term goals

Your short- and long-term goals are important in deciding whether refinancing is a good idea. Ask yourself if you’re refinancing for the right reasons. If you’re going to refinance to splurge on discretionary purchases, that’s probably not a wise move. Think carefully about what the future holds. Do you plan to sell your home or make any other large investments in the next 5 – 10 years? Answers to questions like this will affect whether the cost to refinance your mortgage is worth it.

Short-term goals

For many, a mortgage payment represents their biggest monthly expense. If a large mortgage payment puts too much pressure on your household budget, refinancing into a lower monthly payment could reduce your financial stress.

Another short-term goal might be to renovate a dated bathroom. If you don’t have the cash on hand for that expense, pursuing a cash-out refinance could help you make that project a reality.

Long-term goals

When financing a home purchase, the interest attached to the loan represents a significant portion of your costs. Although it depends on the situation, many homeowners spend thousands of dollars on interest over the course of the loan. For some, the thought of paying hundreds of thousands in interest is unpalatable.

If you have the long-term goal of paying less in interest charges, refinancing into a mortgage with a lower interest rate or shorter term could make sense.

3. Use a mortgage refinance calculator

When deciding on a mortgage refinance, using a calculator can help you map out the numbers for your unique situation.

To get a basic idea of how a refinance could affect your monthly mortgage payment, use a refinance calculator. Simply input some basic information about your current mortgage balance, monthly payment, home value, ZIP code, and credit score range. You’ll instantly be able to calculate what your refinance payment could look like.

Seeing the math behind your refinance might illuminate a clear path to the best option for your situation. For example, you might discover you could lock in a lower monthly payment or possibly save a significant amount on interest through a straightforward refinance.

4. Calculate your break-even point

After using a refinance calculator to see how much you’ll save on your mortgage payments each month, you can calculate your break-even point to see if it makes financial sense to refinance.

Let’s say you save $200 a month by refinancing and your closing costs are $18,000. Divide your closing costs by your monthly savings ($18,000 divided by $200), and you’ll see it should take 90 months – or 7.5 years – to break even.

This may seem like a long time, but if you’re planning to stay in the home longer than 7.5 years, you’ll end up saving money. If you don’t intend to stay this long, however, it probably wouldn’t be wise to refinance. That’s because you’ll end up spending more money on refinancing than you save.

The bottom line: Consider all the factors before refinancing

If you are wondering if you should refinance your home, there is no clear-cut answer. Nor is there a definitive time when to refinance your home. Everyone’s situation is different, but a refinance can be a worthwhile financial endeavor for some homeowners.

Before moving forward, take the time to find the right mortgage refinancing option for your specific situation – if you’ve determined that a refinance is the way to go.

Ready to get started with refinancing or with a brand-new mortgage? Start the approval process today with Rocket Mortgage^®.