When To Refinance: 3 Steps to Deciding Whether to Refinance or Not

Deciding when to refinance your home loan depends on several factors besides whether you can get a better mortgage rate than you already have. And though there are many reasons people refinance their mortgage, some are smarter financial moves than others.

For example:

  • Using refinance savings on your mortgage payment to up retirement contributions or shore-up your budget? Smart.
  • Cashing out equity and going on a spending spree ? Not so much.
  • Cashing out to renovate your kitchen and bathrooms to increase the value of your home? It all depends.

Mortgage interest rates are at historic lows. There was a time when any interest rate under 10 percent was considered good; yet today qualified buyers are securing 30-year fixed interest rate loans for less than 4 percent, and 10- and 15- year loans can be had in the 3 percent range — sometimes lower.

Those great rates have made refinances popular again for the first time since before the housing bubble popped. But when should you refinance? Does it make sense for you? Answer these questions to decide whether to refinance or not.

1. What do you stand to save by refinancing?

There are two big reasons to refinance: To reduce your monthly mortgage payment or to save on the overall interest you will pay on your house in the long run. In the best case, a refinancing will do both, but that doesn’t always happen. For example, if you have 25-years left on a 30-year mortgage and refinance again for a 30-year term at a lower rate, you’ll get a lower monthly payment, but may end up paying more interest in the long-run because now you’ll pay your home off over at total of 35 years. If, however, you have 25 years left on your loan and refinance with a 15-year mortgage, your monthly payment may actually go up, but you may pay tens of thousands less in interest over the long run (and you’ll have your house paid off 10 years sooner).

A loan officer or mortgage broker can help you run scenarios that show you the cost and potential savings of refinancing. Because remember: Refinancing costs money, to the tune of several thousand dollars. You’ll pay application and origination fees, a fee to have your home reappraised and, in some cases, mortgage points that reduce your new interest rate. This article explaining what your mortgage rate really means can help you decode the various costs that go into your mortgage.

2. How long will  you keep your home?

In most cases, it only makes sense to refinance if you plan on staying your home for several more years. So if you may sell the property soon, don’t refinance. Most refinances take between several months and several years to break even and begin saving you money. Your loan office or mortgage broker can help you determine when you’ll break even.

3. Will you — and your home — qualify to refinance?

Even if a refinance makes sense in your situation, you’ll still need to qualify. And just because you have a home and are making timely payments does not mean you’ll be able to refinance your loan. Your ability to refinance depends on several factors, especially:

  • The amount of equity you have in your house
  • Your income
  • Your credit

Applying to refinance requires an entirely new underwriting process. The bank needs to see that the home is worth more than the loan value, that you earn enough to afford the monthly payments, and that you are creditworthy. Check your credit score online for free (really) here. Unfortunately, if you are underwater on your current mortgage, it may be difficult to qualify for traditional mortgage refinancing.

My view: When to refinance

Although every situation is different, I would recommend investing refinancing your mortgage if:

  • Current interest rates are at least 1 percent lower than your existing rate
  • You plan on staying in your home for another 5 years (give or take)
  • You anticipate being approved for the refinance loan

Deciding when to refinance is no small decision, so don’t jump on the refinance band-wagon just because other people you know are doing it. Take some time to figure out what your total costs would be, what your new monthly payments would be, and whether or not it’s the right decision for you.

Want to get personalized refinance offers? Get up to five refinance quotes online with no obligation »

This article was last updated on Feb. 1, 2013. Originally published Oct. 25, 2010.

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website


  1. We use a local lender called Luana Savings Bank and they let us refinance without closing costs. We took advantage of this last year and are doing it again this year. Seems like a no-brainer to keep our same monthly payment but knock off two years and get a lower interest rate!

  2. is excellent. Plus always shop around. Good advice,Robert.

  3. Dave, those costs sound astronomical. Suggest browsing your options at a web site tailored to return quotes from several brokers at once. is not bad.

  4. Hi Dave.I know this is probably not the answer you wanted to hear but I would recommend sitting down with a lender. There are so many other factors in determining if its right for you (your income, your credit, can you afford those closing costs, how long you plan to stay in the house, etc). Best of luck in whatever you decision is! :)

  5. I have a chance to refinance at 4% for 30 years reducing my payment from $1128 to $955 saving $173 per month. Closing costs $5550. I just refinanced from 6% to 5%. I’m 2 years into a 30 year mortgage. Should I do it or not?

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