How to Figure Out When You Should Refinance Your Mortgage

Refinancing is the process of getting a new mortgage in place of an existing one but at a (hopefully) better rate. People choose to refinance their mortgage loan for different reasons, including:

– To get a lower interest rate

– To change their mortgage company

– To reduce their monthly mortgage payments

– To make a big purchase from the refinance money

By refinancing, your existing loan is actually paid off with the refinance amount, and a new loan is created. Refinancing makes sense if:

You have an Adjustable Rate Mortgage (ARM): You might start off your ARM with a fixed, low rate but this rate usually increases as the years go by. These adjustments will make your ARM extremely expensive, which is why many people with an adjustable-rate mortgage refinance to a fixed-rate mortgage. 

To get a shorter loan term: If your original mortgage has for a long term, say 30 years or more, refinancing to a 15-year fixed-rate mortgage with a new, higher payment that you can now afford makes sense and helps you save costs. Keep in mind that if you have a 30-year loan and you’ve already been paying it off for, say, 10 years, refinancing to another 30-year loan will, in fact, increase the cost of your loan. Make sure that the monthly payment and the overall loan term are lower than what they would have been if you stuck to your current loan. 

The cost of refinancing is not absurdly high: The costs associated with refinancing (closing costs) depend on the lender, your home location, and the amount you want to borrow. Typically, closing costs may come up to 3 to 6% of the loan amount. Refinancing costs typically do not include property taxes, mortgage insurance, and homeowner’s insurance, because you are revising the original mortgage, not taking a fresh one. If these costs are not too high and you are certain that you will be able to save a good amount of money even after paying the refinancing fees, it makes sense to refinance. 

Refinancing your mortgage is worth it if you plan to stay in your home for a long time because that’s when the lower interest rate will start translating into savings.