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.
- 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.
When mortgage interest rates get low, refinancing becomes popular. 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. 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. Or if you prefer to jump into the mortgage refinance process right away, Credible delivers quotes from multiple lenders in just minutes without affecting your credit score.
2. How long will you keep your home?
In most cases, it only makes sense to refinance if you plan on staying in your home for several more years. 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 officer 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 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 refinancing your mortgage if:
- Current interest rates are at least 1% 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 »
Where you should refinance
It’s never been easier to get rate quotes and complete loan applications, thanks to the many online lenders now available. Whether you opt for the online experience or prefer a more traditional approach, though, it’s important to get quotes from multiple lenders before making a decision.
Even small savings will add up over the years of monthly payments you’ll be making.
To help you get started, I’ve picked out a couple of our favorite online lenders. You can get a free, no-obligation quote to help you make your decision.
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.
If you like personalized help with your loan application, Reali Loans should top your list. You’ll get a dedicated home loan advisor to work with you from start to finish, ensuring all your questions are answered. The entire process is online, combining speed and convenience with the one-on-one help some borrowers prefer.
To get started, you’ll just answer a few questions about your situation, including your income, credit score, and the amount you’re requesting to borrow. If you’d prefer, you can do a quick rate check to see the basic rates currently being offered. Whichever route you choose, there’s no obligation and no credit check until you decide to move forward.
Figure is a great option for those who want cash out. Figure lets you take out a percentage of your home’s value in cash, with funds deposited soon after the loan goes through. You can apply online and get a no-obligation rate quote with no impact on your credit score.
If you like the quote and decide to proceed, you’ll upload your documents and sign agreements completely online, significantly speeding up the time it typically takes to close a home refinance. If you have any questions throughout the process, you can pick up the phone and speak to a member support representative during business hours.
Today’s mortgage refinance rates:
Editor’s note: This article was originally published in October 2010. It has been thoroughly updated for relevance and accuracy before republication.