Refinancing your mortgage can lower your monthly payment, shorten your loan term or turn your home equity into cash. But refinancing is not always the right move. Knowing when to refinance a mortgage means looking at your current loan, the costs of refinancing and your long-term goals.
The short answer: refinancing may make sense if you can lower your rate, shorten your term, switch from an adjustable to a fixed rate, or access your equity for a goal that fits your budget. It may not make sense if the costs outweigh the savings or you plan to move soon. See our refinance page to learn more.
1. Your current loan terms
Start by reviewing your current mortgage:
- Your current interest rate
- Your remaining loan term
- Your current monthly payment
- Your remaining balance
If your current rate is higher than today's rates, refinancing may lower your payment. If you have an adjustable-rate mortgage and rates are rising, a fixed-rate refinance may add stability.
2. The cost of refinancing
Refinancing is a new loan, and it comes with closing costs similar to your original mortgage. Costs can include:
- Lender fees
- Appraisal
- Title services
- Recording fees
- Prepaid expenses
Ask your lender for a Loan Estimate that shows your new rate, payment and closing costs.
3. The break-even point
The break-even point is how long it takes for your monthly savings to cover the cost of refinancing. To estimate it:
- Find your monthly savings from the new loan.
- Divide the total closing costs by the monthly savings.
- The result is the number of months you need to stay in the home to break even.
If you plan to move before the break-even point, refinancing may not save you money.
4. Your loan term
Refinancing to a lower rate can lower your payment, but if you also restart the term (for example, going from 22 years left on a 30-year loan to a new 30-year loan), you may pay more total interest over time, even at a lower rate.
Refinancing to a shorter term, such as 15 years, can raise your monthly payment but lower the total interest you pay.
5. Your cash flow and goals
Think about why you want to refinance:
- Lower your monthly payment to free up cash flow
- Shorten your term to pay off the loan faster
- Switch from adjustable to fixed for predictable payments
- Access your equity with a cash-out refinance for home improvements, debt consolidation or other goals
If you want to access your equity, learn more on our cash-out refinance page.
6. Your credit
Your credit affects the rate and terms you may qualify for. If your credit has improved since you took out your current loan, you may qualify for better terms. If it has dropped, refinancing may be more expensive.
7. Your long-term plans
How long you plan to stay in the home matters. If you plan to move soon, the closing costs may not pay off. If you plan to stay for years, the savings can add up.
When refinancing may not make sense
- You plan to move within a few years
- Your closing costs are high and your savings are small
- Your credit has dropped and you no longer qualify for better terms
- You have little equity in your home
Frequently asked questions
How much does it cost to refinance? Refinancing costs vary by lender, loan amount and location. Ask for a Loan Estimate to see your estimated closing costs.
Will refinancing lower my payment? It depends on your new rate, term and loan amount. A lower rate or a longer term can lower your payment, but a longer term can increase your total interest.
Can I refinance to access my home equity? Yes. A cash-out refinance lets you borrow more than you owe and take the difference in cash, subject to your equity and the lender's requirements.
How long does refinancing take? The timeline varies, but refinancing is similar to the original mortgage process: application, document review, appraisal, underwriting and closing.
Ready to explore refinancing?
When you are ready, get a free quote or get pre-approved with Alex.
You can also call Alex Al-Ammar at (313) 992-9898 or email Alex@vestalending.com.
This article is for general information only. It is not legal, tax or financial advice. Refinancing has costs and is not right for every situation. Speak with a qualified professional about your individual situation.
