Should you refinance your mortgage?

If you’re considering refinancing your mortgage, you’re not alone. Millions of people refinance their mortgages each year, for a myriad of reasons: to get a cheaper interest rate, to lower their monthly payments, or to speed up when their mortgage comes due.

Whatever reason you have for considering refinancing, we’re here to walk you through the pros and cons of it.

What is refinancing your mortgage?

When you refinance your mortgage, you trade your current mortgage terms for (usually) more favorable terms.

At its very core, refinancing is where another company buys out your current mortgage and starts a new mortgage with their company. In some circumstances, you can refinance with your original lender as well, but the process remains similar. You switch out everything: your mortgage rates, your payments, how long it’ll take to pay it off.

Since you’re essentially taking on a new mortgage, you’ll also have to pay closing costs again. This will be anywhere from 3% to 6% of the refinancing value. And you need to decide if paying that money is worth refinancing. 

What to consider before refinancing

The decision of whether to refinance depends on your current situation. Ask yourself the following questions to see if refinancing is the right option for you:

1. What is my current interest rate?

Interest rates are high right now. If your interest rate is lower than current rates, it might not be the right time to refinance. Unfortunately, odds are that if you bought a house in the last 10 years, you won’t save money by refinancing right now.

However, if your goal is to have a loan with lower monthly payments, or to shave repayment time off your mortgage, you might not care about the mortgage rate if those other conditions are met.

Read more: When the Fed hikes interest rates, what does that mean for your wallet?

2. Will I come out ahead with refinancing costs?

Refinancing your house costs money since you have to repay closing costs, typically somewhere between 2% and 6% of your refinancing value.

If the thousands you spend refinancing your house doesn’t save you money or time in the long run, it might not be worth it. Refinancing should put you ahead on your mortgage, and if it’s not doing that, then you should hold off.

3. Will it save time paying down my mortgage?

You could refinance from a 30-year fixed mortgage to a 15-year fixed and shave over a decade off your loan. That can be helpful if you’re planning on staying in your home for the duration of the loan and don’t plan on moving any time soon.

However, that’s not the only way you can cut down on payments. You don’t have to refinance your home in order to pay it off early:

• You can add money onto your regular payment.
• You can add an extra payment every year.
• You can pay your mortgage every two weeks.
• You can add lump sum payments when you get windfalls.

There’s nothing saying you have to refinance to save money on your interest payments when you pay down your mortgage.

Read more: What percentage of your income should your mortgage be?

4. Will refinancing create a lower payment?

Sometimes people refinance so they can have a lower monthly payment. They do this by extending their loan out or decreasing their interest rate. The problem is, right now, interest rates are not low enough to beat what most people are probably paying. And you could extend your payment, but that’s going to mean you’re paying more in interest over time.

If you’re seeking a refinance because you’re struggling for cash, it may be worth cutting your budget in other places. You don’t want to be saddled with a loan that has bad terms in the long run because you were looking for relief in the short term.

Read more: What does a realistic budget look like?

5. What are your reasons for refinancing?

Let’s say you just got divorced, or split up a business, or need to get someone’s name off the house. In cases like these, you might not need to refinance. Instead, you can ask your lender for a loan modification or a loan assumption.

Meet Jones and Mark. They’re going through a divorce. They have a $250,000 mortgage that they took out in 2020, when loan prices plummeted. Their rate is only 2.25%. If they were to refinance to take Jones’ name off the property, they’d have to use today’s rates, which are sitting around 6.25% (with some fluctuation). That’s a huge financial jump that would be a burden to Mark.

Instead, they reach out to their lender and ask about a “loan assumption,” which means taking over the existing loan and allowing you to take a person’s name off it without doing a full refinance. This is great for times like these when rates are rising.

Is now a good time to refinance?

It depends. For most people, no. Mortgage rates are at a 15-year high, and most mortgage experts advise not refinancing until the percentage rate drops lower than 0.75% of your current mortgage. For the majority of people who follow that advice, now isn’t the right time to refinance your home.

But on the off chance you had sub optimal terms when you first purchased your home, it might be a good time. Let’s say that when you purchased your home, your credit was hovering around 580, and for a variety of reasons, you couldn’t get an interest rate less than 7%. Now might be a great time to refinance your home if you have a better credit score now.

Read more: How your credit score affects your mortgage rate

Best mortgage refinancing lenders

Credible

In only three minutes, you can prequalify for a mortgage refinance with Credible. During that process, Credible delivers quotes from multiple lenders without affecting your credit score. If you see a rate you like, you can do everything online, including uploading documents through the website and monitoring the progress of your application.

Credible can help you with cash-out refinancing, as well. When it comes to mortgage refinancing, though, one of the best things about Credible is its transparency. You can see from the start what fees you’ll be expected to pay and the interest rate you’ll be issued to help you make a fully informed decision before filling out a detailed application.

Fiona

Fiona helps you shop and compare mortgage rates from multiple lenders side by side all in one place. All you need to do is fill out a few fields on their rate table and hit “search” to see rates for your loan amount and credit score, among other variables. Fiona can help you find both fixed and adjustable-rate mortgages, and you can refinance a single-family home, condo, or duplex, triplex, or quadplex.

If you like any of the rates you see on the screen, you can click to see more details. This will redirect you to the lender’s page, where you enter more information for a personalized rate quote. Only if you decide to proceed with your lender of choice will your credit be checked, so it’s a great way to get an idea of the rates that are available to you.

The bottom line

Refinancing your mortgage is a very personal decision. You have to decide what’s going to work best for you and your family. If the current rising rates are still lower than what your interest rates are, it might be a great time to refinance. If they’re not, you’re going to have to see whether the pros outweigh the cons to refinancing your mortgage.

See if you can do something else instead. Maybe house hacking to save on mortgage costs will help you maximize your budget a bit. That might give you the wiggle room to not need to lower your interest rates.

You can also get creative with your side hustles and put a little toward the mortgage each month to help decrease costs without refinancing.

Overall, now isn’t the best time to refinance your mortgage, and you should pursue other options to help with the mortgage if that’s your main reason for pursuing a refinance. Because you’re probably not going to save money or lower your interest rate right now.

Read more:

• How much does a 1% difference in your mortgage rate matter?
• Should you pay off your mortgage early?