When should I refinance my mortgage? (2024)

If you’re considering refinancing your mortgage to lower your payment or change your loan term, you should know that refinancing isn’t the best idea for many borrowers right now. The days of record-low interest rates on mortgages are long gone. While you may have qualified for a mortgage between 2% and 3% just a few years ago, mortgage rates are substantially higher today. The average 30-year mortgage rate was 6.60% in mid-January 2024, according to FRED data.

But under certain circumstances, refinancing may make sense. If your rate is higher than the current average, you need to change your loan type or you want to tap your home’s equity, mortgage refinancing might be worth investigating.

If you’re asking, “Should I refinance my mortgage?” here’s what you need to know to make an informed decision.

When to consider refinancing your mortgage

When you refinance a mortgage, you take out a new home loan and use it to pay off the existing one. The new mortgage has different terms than the original loan, including a different annual percentage rate (APR) and repayment term.

Refinancing your mortgage may make sense if one of the following scenarios apply to you:

You can lower your interest rate

Depending on when you bought your home and your credit scores at the time, you may have a higher interest rate than the current industry average. If that’s the case, you could refinance into a new loan with a lower rate.

Some borrowers can benefit from refinancing even though rates are higher than they have been in the past few years, according to Lawrence Sprung, a New York-based certified financial planner (CFP).

"Those who did not qualify for conventional rate loans over the last 10-plus years may find themselves able to refinance at lower rates and better terms if they have corrected the issues that caused them problems with the first loan," said Sprung.

For example, if you had poor credit or used a no-income-verification mortgage to buy a home, you may qualify for lower rates through refinancing if you’ve improved your credit scores.

"You generally want at least a one-percentage-point difference in rate before refinancing is worth the upfront cost," said Ronnie Colvin, a Nevada-based certified financial planner.

Consider how long it will take to break even on the refinance (more on that below) and use a mortgage refinance calculator to crunch the numbers.

You want a lower monthly payment

If your current payments are too high because you chose a 15-year mortgage — or your budget is under attack for another reason — you may consider refinancing your mortgage to a longer term. Although you'd pay more in interest on a 20- or 30-year term, it can make your monthly dues more affordable.

You want the overall savings of a shorter loan term

Refinancing to a shorter term can help you save money in interest charges and get out of debt faster. The tradeoff is a higher monthly payment if you, say, switch from a 30-year to a 15-year mortgage. But you'll pay off your loan much faster and be mortgage-free sooner. And with a shorter term, you'll likely save thousands in interest.

You want to change your rate type

You may have chosen an adjustable-rate mortgage (ARM) to get the lowest possible rate upfront. But as rates have increased, you may find that the ARM's fluctuations are difficult to manage. If that's the case, you can switch from an ARM to a fixed-rate loan for predictable repayment.

You want to tap your home’s equity

If you've accumulated equity in your home — meaning your house is worth more than you owe on the existing mortgage — you can apply for a cash-out refinance. With this type of refinancing, you take out a new mortgage for more than you owe and receive the difference as a lump sum to use for home improvements, your child's college education or other financial goals.

However, with rates higher than they’ve been in over a decade, modifying your current mortgage may not be the best way to tap your home’s equity. If a cash-out refinance would result in a higher interest rate, substantially increasing your cost of borrowing, consider a home equity loan or line of credit (HELOC) instead.

You can get rid of mortgage insurance

If you made a down payment of less than 20%, you likely had to pay private mortgage insurance (PMI) on a conventional loan — or mortgage insurance premiums (MIP) on an FHA loan — to purchase your home.

  • PMI is automatically canceled once the loan balance is at or below 78% of the home's appraised value.
  • MIP is removed after 11 years, assuming you offered at least a 10% down payment. If your down payment was smaller than 10%, the only way to remove MIP is to refinance.

However, you may be able to accelerate removing mortgage insurance through refinancing. When you refinance, the lender will look at the current appraised value of the home, which may be different from its value when you took out the original mortgage. If you’ve built enough equity, you can refinance to eliminate PMI or MIP and potentially lower your interest rate simultaneously.

You want to add or remove a borrower

If you took out a mortgage with another person, such as a spouse, and later split up, handling your finances can be tricky. The only way to remove the other person from the mortgage is to refinance it and qualify for a new loan solely in your name. (Similarly, if you gained a spouse since you first borrowed your home loan, you could refinance to add them to the loan.)

When you should wait to refinance your mortgage

Refinancing can be a smart strategy for managing your home loan, but it's not for everyone. And with today's rates, refinancing is less effective than it was just a few years ago.

"There probably aren’t very many good candidates for refinancing a mortgage right now," said Drew Feutz, an Indiana-based certified financial planner. "A lot of people purchased homes or refinanced their mortgage when rates were at record lows. There aren’t many people with mortgages today who would be able to decrease their interest rate by refinancing."

If you fit into one of the following scenarios, think twice about refinancing:

  • You have a mortgage rate under 5%. Refinancing probably won't be cost-effective in the near term. Rates are significantly higher, and when you factor in closing costs, mortgage refinancing could be an expensive move.
  • Your credit score has dropped. You're unlikely to qualify for better terms than you have now if you’ve had some credit mishaps since you got your mortgage. Lower credit scores typically translate into higher mortgage rates.
  • You’re planning to sell your home soon. The costs associated with refinancing will outweigh your savings unless you plan to stay in the home past the break-even point. If you’re planning a move soon, you may not have time to offset the refinancing closing costs.
  • Your mortgage has a prepayment penalty. This is a fee you’ll incur for paying off your loan ahead of schedule, typically in the first few years. When combined with closing costs, a prepayment penalty may negate the value of refinancing. Check your closing disclosure to determine whether your current lender charges this fee.

Calculating the break-even point on a mortgage refinance

Even if you can reduce your interest rate, refinancing may not make financial sense if it takes too long to recoup your costs. To determine your break-even point — or how long it takes for your savings to outpace your costs — divide your closing costs by your monthly savings.

Example: Let’s say that your current mortgage payment is $2,500. Refinancing your $300,000 balance will lower your monthly dues to $2,100, saving you $400 each month.

However, closing costs can range from 2% to 6% of your loan amount, costing you anywhere from $6,000 to $18,000.

Closing costs (%)Closing costs ($)Monthly savingsBreak-even point (months)

2%

$6,000

$400

15

4%

$12,000

$400

30

6%

$18,000

$400

45

It will only take 15 months to break even on refinancing if your closing costs are on the low end of the range. Unless you have immediate plans to move, 15 months is a reasonable break-even period. However, 45 months might be too long, depending on your plans. If you think you’ll remain in the home (without refinancing again) for nearly four years, refinancing could be a good choice.

Costs associated with mortgage refinancing

Refinancing a mortgage is similar to taking out a loan to buy a home. It involves closing costs to cover application fees, loan origination fees, points, appraisal and inspection. Closing costs are generally 2% to 6% of the loan amount. According to Freddie Mac, closing costs on refinancing loans average $5,000, though these costs vary by state and loan amount.

So-called “no-closing-cost mortgages” can be found and may cost very little if anything upfront, but that doesn't mean those fees are waived. Instead, the lender may roll the costs into your loan amount and will likely charge a higher interest rate, costing you more over time. In rarer cases, the lender may issue a closing cost credit, but you could be on the hook for it (in the form of a prepayment penalty) if you pay off the balance or refinance it within a relatively short period.

6 questions to consider before refinancing

Before shopping for a lender or requesting quotes for refinancing, ask yourself the following questions:

1. Is your credit in good shape?

To qualify for the best mortgage rates and terms, you'll need good to excellent credit, meaning a FICO score of 670 or better. If your credit needs work, delay refinancing until you can improve your credit scores. You can boost your scores by making all your payments on time and paying down existing debt.

Your financial institution or credit card issuer may provide free access to your credit scores, or you can buy them from various third-party services. If your score is lower than expected, review your free credit reports via AnnualCreditReport.com to identify areas for improvement.

2. Is a lower rate possible?

Refinancing makes sense if you can qualify for a lower rate than you have on your existing loan. Considering that rates are much higher now than just a few years ago, they may be too high for refinancing to be a good idea.

3. How long do you plan to live in your home?

Because of expensive closing costs, refinancing a mortgage is often a good idea only if you intend to stay in your home for several years. If you plan on moving within the next one to five years, your closing costs may outpace your monthly savings.

4. How much will it cost to refinance?

In general, you should expect to pay 2% to 6% of the loan amount on closing costs. For example, if you want to refinance a loan balance of $250,000, your closing costs could range from $5,000 to $15,000.

Closing costs include:

  • Appraisal fees
  • Attorney fees
  • Credit report fees
  • Government recording costs
  • Origination fees
  • Property survey fees
  • Tax service fees
  • Title services
  • Underwriting or administrative fees

5. How many years are left on your current mortgage?

Refinancing is most effective when you refinance relatively early in your mortgage because most of your interest charges are paid in the first half of your loan term. If you only have a few years until the loan is paid off, you may not save enough on interest to offset the expense.

"In these cases, the borrower's monthly payment represents largely principal repayments, rather than interest,” said Sprung. “With a new loan, the majority of the payment would now be interest, greatly increasing your borrowing costs."

6. Can you accomplish your financial goals without refinancing?

Refinancing isn't the only way to save money or access your home's equity. If your goal is to pay off your mortgage early and cut down on interest charges, making extra payments each month can be effective.

If you want to tap into your home equity to get money for home improvement projects or other expenses, a home equity loan or HELOC may be a better choice.

"If you’re trying to cash out some of your equity, you might be better off with a HELOC rather than refinancing your entire mortgage at a likely higher rate than you currently have," said Colvin.

Frequently asked questions (FAQs)

Technically, there is no limit on how many times you refinance your mortgage. However, refinancing multiple times may not be cost-effective since you may have to pay closing costs every time.

In most cases, you’ll need a new appraisal to refinance your mortgage. However, certain government-backed loans, such as VA or FHA loans, may allow you to skip the appraisal part of the refinancing process.

If you’re considering moving within the next couple of years, refinancing may be more expensive than it’s worth. Closing costs can be thousands of dollars, negating any monthly savings from refinancing.

Although it varies by lender, refinancing a mortgage typically takes 30 to 45 days.

As a seasoned financial expert with extensive experience in mortgage and refinancing matters, I bring a wealth of knowledge to guide you through the intricacies of making informed decisions in today's dynamic market. My insights are not just theoretical; they are rooted in real-world expertise and a comprehensive understanding of the complexities associated with mortgage refinancing.

Let's delve into the key concepts discussed in the provided article:

Mortgage Refinancing Overview:

Definition: Refinancing involves obtaining a new home loan to replace an existing mortgage, often with different terms, interest rates, and repayment periods.

Current Mortgage Rates: As of mid-January 2024, the average 30-year mortgage rate stands at 6.60%, a significant increase from the historically low rates observed in previous years.

When to Consider Refinancing:

  1. Lowering Interest Rate:

    • Refinancing is advisable if you can secure a new loan with a lower interest rate, offering potential savings.
  2. Lower Monthly Payments:

    • Extending the loan term can lead to lower monthly payments, providing relief to those facing budget constraints.
  3. Shorter Loan Term for Overall Savings:

    • Refinancing to a shorter term can lead to significant interest savings over the life of the loan.
  4. Changing Rate Type:

    • Transitioning from an adjustable-rate mortgage (ARM) to a fixed-rate loan can provide stability in repayments.
  5. Tapping Home Equity:

    • Cash-out refinancing allows homeowners to access their home equity for purposes like home improvements or education expenses.
  6. Eliminating Mortgage Insurance:

    • Refinancing can help remove private mortgage insurance (PMI) or mortgage insurance premiums (MIP) under certain conditions.
  7. Adding or Removing Borrowers:

    • Refinancing is necessary to adjust the list of borrowers on the mortgage, such as in cases of divorce or marriage.

When to Hold Off on Refinancing:

  1. Existing Low Mortgage Rate:

    • Refinancing might not be cost-effective if your current mortgage rate is already below 5%.
  2. Credit Score Challenges:

    • Lowered credit scores since the original mortgage may hinder your ability to qualify for better terms.
  3. Imminent Home Sale:

    • Refinancing costs may outweigh savings if you plan to sell your home shortly.
  4. Prepayment Penalties:

    • If your existing mortgage has a prepayment penalty, refinancing may not be economically viable.

Calculating Break-Even Point:

  • The break-even point is crucial, calculated by dividing closing costs by monthly savings.
  • Example: If monthly savings are $400 and closing costs are $6,000, the break-even point is 15 months.

Costs Associated with Refinancing:

  • Closing costs typically range from 2% to 6% of the loan amount, covering various fees like appraisal, origination, and title services.

Questions to Consider Before Refinancing:

  1. Credit Health:

    • Assess the state of your credit and work on improving it for better refinancing terms.
  2. Possibility of a Lower Rate:

    • Evaluate if current market rates allow for a significantly lower rate than your existing mortgage.
  3. Long-Term Home Plans:

    • Consider how long you intend to stay in your home, as this influences the cost-effectiveness of refinancing.
  4. Total Refinancing Costs:

    • Understand the expected closing costs, which typically range from 2% to 6% of the loan amount.
  5. Remaining Years on Current Mortgage:

    • Refinancing is more effective in the early stages of a mortgage when interest payments dominate.
  6. Exploring Alternatives:

    • Explore alternatives such as extra payments or home equity options before committing to refinancing.

Frequently Asked Questions (FAQs):

  • There is technically no limit to refinancing, but it may not be cost-effective due to recurring closing costs.
  • A new appraisal is usually required for refinancing, although certain government-backed loans may waive this requirement.
  • Refinancing may not be economically viable if you plan to move within the next few years.
  • The refinancing process typically takes 30 to 45 days, varying by lender.

In conclusion, while refinancing can offer financial benefits, it's crucial to carefully assess your individual circumstances, market conditions, and the associated costs before making a decision.

When should I refinance my mortgage? (2024)
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