Is Now the Right Time to Refinance My Mortgage?

If you own a home, there’s a good chance your monthly mortgage payments are one of the largest, if not THE largest, expenses in your budget. It can be tempting to look for any way to reduce the cost of your current mortgage.

Refinancing your mortgage can be a great way to save money, especially if you locked in a higher interest rate when your loan was first approved. Whether you can refinance for better loan terms depends on the details of your current loan, loan rates, and whether your financial situation has improved.

What is Mortgage Refinancing?

Refinancing your mortgage is essentially borrowing a new loan with, ideally, a lower interest rate and using it to pay off your existing mortgage. Depending on the specifics of the new mortgage loan, there may be trade-offs.

For example, a borrower may opt for a loan that offers a lower monthly payment than they currently have, but depending on the type of loan, they could still end up with a longer repayment term. This means that unless they also secure a significantly lower interest rate, they may pay more throughout the life of the loan in exchange for more manageable monthly payments.

The opposite can also be true, which may be beneficial depending on your financial goals.

“Paying off your mortgage sooner is another benefit of refinancing,” explains Nate Johnson, real estate expert at NeighborWho. “If you have a 30-year mortgage and 25 years left to pay it off, refinancing to a 15-year mortgage means you would pay it off 10 years earlier than anticipated. Your monthly mortgage payments will be higher, but you will pay more toward the principal balance and less in interest over the life of the loan.”

Of course, you will want to make sure the monthly payments will be manageable for you in this situation. There may also be the option to pay off your current loan earlier, but you will want to check with your mortgage lender to ensure there aren’t any prepayment penalties for doing so.

What Are the Signs That It’s Time for a Mortgage Refinance?

There is no crystal ball that can predict the future and tell you the perfect time to refinance, but keep an eye out for any signs that will help to save you money over time. Below are three tell-tale signs that may point you to a refinance.

1. Interest Rates Have Dropped

When considering a new mortgage, you will want to know what is happening with the current refinance rates.

“As a rule of thumb, refinancing is advisable if you can secure a rate that is at least 0.5% to 1% lower than your current one,” says Certified Financial Planner Jason Ball, “which can significantly decrease both your monthly payments and the total interest paid over the lifespan of the loan.”

2. You Have an Adjustable Rate Mortgage With an Increasing Interest Rate

Refinancing can be a good idea if it allows you to switch to a more advantageous loan type.

For example, if your current home has an adjustable-rate mortgage that will shift upward after a certain period of time, it may be time to refinance to a fixed-rate loan instead. This will guarantee a set interest rate throughout the life of your loan and you won’t have to worry about your monthly payments increasing in the future.

3. You Have Equity in Your Home

If you couldn’t make a large down payment when you first took out your mortgage, you may have been required to take on private mortgage insurance. Essentially these are extra monthly fees paid to your lender to provide them with extra security in the case you default on your loan.

However, if you’ve built up home equity over time by paying off a certain percentage of your loan, refinancing can present multiple benefits, including the ability to drop those monthly PMI payments. If you are able to do this while also securing a lower interest rate and a smaller loan amount (Since, in this case, you’ve already paid off a substantial amount of your original loan – remember?), you could be looking at significant savings.

When Should You Wait To Refinance Your Mortgage?

Assuming your FICO score and other personal finances have not gotten worse since you first signed your mortgage, the main factor to pay attention to will be mortgage interest rates.

If rates have risen higher than the rate on your current mortgage, then refinancing is only likely to raise your costs, especially if you were able to lock in a longer-term fixed-rate mortgage when rates were lower.

Your home’s value may have also changed in one direction or another. If your home value has increased due to home improvements or a rise in local demand, you may have more leverage when refinancing. In contrast, a decrease in value could make it more challenging to refinance.

You should also make sure that refinancing won’t negatively affect your amortization schedule. Mortgage payments are amortized, which means a portion of every payment will go towards the loan balance and interest costs, so that you will finish paying off your loan at a certain time, often as a 15- or 30-year mortgage.

Finally, if you plan to sell your home in the near future, refinancing will likely not save you money, even if rates are lower. That’s because refinancing isn’t free, and the costs of going through the process – which can include lender fees and appraisal costs – can be significant.

Johnson suggests calculating your “break-even point,” or the date when the money you save by refinancing will outweigh the upfront closing costs, to help guide your decision.

Is Mortgage Refinancing a Good Idea?

That depends. The benefits of mortgage refinancing will vary from homeowner to homeowner and across different times depending on personal and larger economic factors.

While we’ve gone over many potential timing factors you should consider, there are also situations where a refinance may never be to your benefit. For example, if you have an FHA or VA loan, you may already have better terms than you’ll be able to receive with a conventional mortgage.

As it was when you were a homebuyer, you’ll want to speak to multiple lenders when considering refinancing to be sure you get the best mortgage for your situation.

The Bottom Line

Refinancing can be a good idea if it will save you money in the long run. However, it’s important to examine your future plans and the entire financial picture before making a decision. Speaking with a mortgage advisor or broker can help to make a decision if you aren’t sure.