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- Mortgage rates are still relatively high, meaning it might not be the best time to refinance.
- You may want to refinance from an ARM into a fixed-rate mortgage if you're worried about your payments increasing.
- You could refinance into a shorter term so you can pay off your mortgage sooner.
The mortgage refinancing process can be laborious and expensive — but if the conditions are right, it can be worth it in the long run. Before jumping in, you want to make sure you're refinancing for the right reasons.
Some people refinance for reasons that ultimately aren't financially beneficial. For example, you might refinance into a longer term for lower monthly payments, but end up paying thousands more in interest by extending your loan.
There are plenty of good reasons to refinance, though. Here are five times it could be useful to refinance your mortgage.
Should I refinance my mortgage now?
The answer to this question usually depends on current mortgage market conditions. Generally speaking, now isn't an ideal time to consider a mortgage refinance.
If average mortgage rates are much lower now than they were when you got your current mortgage, you might be able to cut your monthly payment by a significant margin.
But if average rates are higher than your current rate, there's likely little benefit to refinancing. Right now, average 30-year mortgage rates are still relatively high. However, many experts expect that rates will drop this year, so those looking to refinance may find a better deal toward the end of 2023 or in the following years.
If you're in need of cash to reinvest in your home or consolidate high-interest debt, a cash-out refinance could make sense, since homeowners have gained a lot of equity over the past couple of years thanks to rapidly increasing home values.
But be sure to consider the big picture — if you're taking on a larger monthly payment or a higher rate, you might be better served seeing what kind of offers you can get from some of the best HELOC lenders.
5 reasons to refinance your home
1. To lock in a lower rate
A lower rate can translate to a monthly mortgage payment that's potentially hundreds of dollars less than what you're currently paying. For example, a $200,000 loan with a 5% interest rate has a monthly payment of $1,074. That same loan with a 3% rate has a monthly payment of $843.
Keep an eye on average mortgage rates to see if refinancing into a lower rate is possible for you.
2. To switch from an ARM to a fixed-rate mortgage
Maybe your initial mortgage was an adjustable-rate mortgage, which keeps your rate the same for the first few years, then changes it periodically. If your intro rate period is coming to an end, you may be considering what your next step is.
ARMs can seem attractive when rates are high, because they typically start with lower rates than fixed-rate mortgages. But rates have been increasing this year. If you're worried about your monthly payments going up, you may want to consider refinancing into a fixed-rate mortgage.
3. To shorten your loan term
Do you want to pay off your mortgage early? Refinancing into a shorter-term mortgage could be a good way to do it.
Maybe you have 25 years left on your mortgage, but you want to refinance into a 15-year loan. Doing so will shave 10 years off your mortgage. You'll also pay a lot less in interest because a) your new mortgage may have a lower rate than your old one, and b) you'll be paying interest for a shorter amount of time.
Beware, though, that a shorter term doesn't guarantee you a lower interest rate. For example, if you got a 30-year mortgage when rates were at historic lows and now want to refinance into a 15-year term, you could actually end up with a higher interest rate than what you currently pay.
4. To tap into your home equity
If your home has gained value since you bought it, you might be considering a cash-out refinance. With this type of refinance, you take out a loan larger than the amount you still owe, and you receive a portion of your home's gained value in cash.
Think about how you would use the money before you apply for a cash-out refinance. This kind of loan can be great for paying off high-interest credit card debt, making home repairs, or making purchases that would otherwise improve your financial situation.
You probably don't want to use a cash-out refinance for frivolous purchases. You'll have to pay fees when you refinance, so refinancing for unnecessary reasons might not be worth the cost. But there are no legal restrictions for how you can spend the cash. Ultimately, you're the one who decides whether a cash-out refinance is worth the money and effort.
5. To get rid of mortgage insurance
If you have an FHA mortgage and are currently paying mortgage insurance in spite of having more than 20% equity in your home, refinancing into a conventional mortgage can help you get rid of it.
On FHA mortgages, mortgage insurance typically is paid for the life of the loan. If you'd like to get rid of this monthly payment, and your credit is decent, you may be able to refinance into a conventional mortgage without PMI.
On conventional mortgages, you'll pay private mortgage insurance until you reach 20% equity. Once you reach this point, you can ask your lender to cancel it. Otherwise, the lender will typically cancel it automatically when you reach 22% equity.
Canceling mortgage insurance by itself might not be the best reason to refinance, because you could pay more in fees and interest than you would save on your monthly payments.
Mortgage refinance savings example
How can refinancing your mortgage save you money? Let's take a look at an example.
Say you bought your house five years ago with a $300,000 30-year fixed-rate mortgage. Your rate is 5% and you pay $1,610 each month. Currently, you still owe $260,000 on your mortgage, and you're considering refinancing into a new 30-year loan at a 4% rate. Is it worth it?
If you continued with your current mortgage for the remaining 25 years, you'd ultimately pay $279,767 in interest.
If you refinance into a 30-year mortgage with a 4% rate, your new mortgage payment would be $1,241, putting nearly $370 back into your monthly budget. You'd also end up saving on interest over the long term, paying $186,860 over the life of the loan.
| Old mortgage | New mortgage | |
| Interest rate | 5% | 4% |
| Monthly payment | $1,610 | $1,241 |
| Total interest paid | $279,767 | $186,860 |
This means refinancing would save you almost $370 each month, as well as $92,907 in interest over the life of the loan.
Keep in mind, though, that you'll also pay closing costs on this new loan. Paying closing costs mean it will take some time for you to break even on your refinance.
With closing costs equal to 3% of the $260,000 loan amount, you'd pay $7,800 at closing. You can determine how long it will take you to break even by dividing the amount you pay in closing costs by the amount you're saving on your monthly payment.
In this example, it would take you around 21 months to break even on your refinance (7,800 ÷ 370 = 21.08). This means that if you plan to sell your home within this time, refinancing might not be worth it, because you'll end up spending more than you save.
When refinancing isn't worth it
Because it costs money, you should think carefully about your reasons for wanting to refinance. Many times, refinancing just isn't worth it.
- You're planning to move soon. As we saw in the example above, refinancing can end up costing more than what you save if you don't stay in the home long enough to hit your break-even point.
- Rates aren't that much lower. Many experts advise borrowers to only refinance if they can drop their rate by a percentage point or more.
- There are better ways to get cash. A cash-out refinance can be a useful financial tool if you need a large amount of money to pay for something that will benefit you, like a value-boosting home upgrade. But it's not the only tool at your disposal. A HELOC, home equity loan, or even unsecured options like a personal loan or credit card could be cheaper, safer alternatives, depending on your situation.
- You're ignoring more important financial goals. Refinancing to save money on interest or pay off your home faster can be a worthy goal, but it shouldn't come at the cost of something more important, or something that has a better return. If you're spending money to refinance that you could otherwise be putting into your retirement savings, for example, you might want to reconsider.
Things to consider before you refinance
Two people may have the same reason for refinancing, but it's a good financial move for one and a bad move for the other. Before refinancing, you should consider a few things.
- Are your finances in a good place? Your credit score and debt-to-income ratio play a big part in what interest rate you get. A higher credit score and lower DTI ratio typically result in a better rate. If your credit isn't in the best shape, you could end up with worse terms than what you have on your current mortgage.
- How long will it take to break even? If you refinance into a lower monthly payment, you'll eventually recoup the amount you paid, but how quickly that will happen depends on your new payment amount.
- Do you have enough enough equity to take cash out? Your equity is the difference between what your home is worth and what you owe on your mortgage. Depending on your lender, you may need to keep at least 20% equity in your home to qualify for a cash-out refinance.
- Can you afford to refinance? Average refinance closing costs vary from state to state, but generally you can expect to pay at least a couple thousand dollars.
- What lender will you use? You don't have to refinance with your current lender. Be sure to shop around and compare two or three different lenders to find the best mortgage refinance lender for you.
When to refinance mortgage frequently asked questions
At what point is it worth it to refinance?
Experts typically recommend that you wait to refinance until mortgage rates are at least a full percentage point below your current rate.
How long should I wait to refinance my mortgage?
Often, you don't have to wait to refinance. Whether or not you should wait depends on where rates are currently compared to the rate you're paying, and where they might go in the near future.
How early is too early to refinance a mortgage?
If you have a conventional mortgage, you can generally refinance right away. Some lenders require you to wait at least six months, but you can refinance with a different lender if you don't want to wait. The exception is if you're trying to do a cash-out refinance; with that, you'll have to wait at least six months. With other types of mortgages, such as FHA mortgages, you may be required to wait between six to 12 months before refinancing.
Does refinancing always lower your payment?
Refinancing doesn't always lower your payment; some borrowers refinance to pay their homes off faster. This means refinancing into a shorter loan term, which would result in a higher monthly payment.