When Should You Refinance a Mortgage?

Now that mortgage rates have decreased, plenty of homeowners are considering refinancing their home loan. However, the mere fact that refinancing have become that much more common does not automatically justify this strategy for every single indebted homeowner. The key is to know when, exactly, the optimal time to refinance a home mortgage is and comprehensively review all mortgage refinance options before making a decision. For the most part, it only makes sense to refinance a home mortgage in order to save money, accumulate equity, and pay down the debt in a reasonable amount of time.

When It Makes Sense to Refinance

If refinancing reduces the home mortgage interest rate in the range of half a percentage point to three-quarters of a percentage point, it is a good idea to refinance. However, it is important that you run the numbers down to the very last penny to ensure the aggregate savings on the monthly mortgage payment justifies the inherent cost of refinancing.

For example, if you run the numbers and determine you would have a net loss after moving on from the property in a year or two, refinancing might not be worth it. But if you know you will be in the home for many years, if not indefinitely, then it might make sense to refinance. If there is any chance you will move to a new house or get a different job in a different area, refinancing might end up costing you more than you would save. When in doubt, consider all of the mortgage refinance options before making a decision. A thorough analysis of all available options will help you determine whether one of the mortgage refinance options makes sense for your unique situation.

Consider the Amount of Equity in Your Home

Making a home loan payment is not exactly a cakewalk regardless of whether the economy is booming or on the downswing. Each mortgage payment heightens your ownership stake in the property. Home values typically move upward as time progresses, meaning you have an ownership stake in an asset that becomes more valuable over time. The question is whether it is sensible to refinance an existing home loan when you have minimal total equity.

In general, if you do not have 20% or more of the property’s equity, it might not be wise to refinance. Ownership of less than 20% of the property’s equity will make refinancing a bit of a headache in terms of requirements, stipulations, fees, etc. In particular, private mortgage insurance is typically required for refinancing a mortgage when the homeowner has less than 20% equity. However, if you are already paying private mortgage insurance through the original home loan, refinancing won’t be as much of a financial strain as this extra cost is already included in your monthly payment.

What Matters Most: The Cost of Refinancing

Sadly, refinancing a home mortgage has inherent costs. You will likely have to shell out upwards of 3% of the principal, meaning the total amount of money borrowed, along with third-party costs ranging from title insurance to appraisal costs, taxes, settlement fees, etc. Certain lenders provide loan programs that cover closing costs yet these programs typically have an elevated interest rate. Furthermore, there might be some tax ramifications resulting from the refinancing. If you deduct your mortgage interest from your federal income taxes each year, refinancing will help reduce your interest payment yet decrease your deductions too. This is not reason enough to not refinance the mortgage yet it should certainly be considered before making the decision to refinance.

Do Your Homework Before Refinancing

In the end, those who take the time to crunch the numbers and read the fine print of the refinancing terms will make the best decision. Do not let today’s low interest rates tempt you into refinancing; once you consider the total costs of refinancing, it might not be worth it, especially if you don’t plan on staying in the house for more than a couple more years. Take a close look at all the mortgage refinancing options. It’s always a good idea to consult with a mortgage expert to ensure you make the best decision for your personal finances as well as the financial well-being of your family. We’ve got answers to your refinancing questions. Contact us today to learn more about the benefits of refinancing your home and what it will take to make it happen.

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