If you’ve been paying off your current mortgage for a while, it may be a good idea to refinance. By refinancing, you pay off your current loan and replace it with one that (ideally) has more favorable terms.
However, it’s important to know whether it’s worth it to refinance your mortgage. During refinancing, you’ll go through the entire application and approval process over again, so it should at least balance out the costs in the end.
The Best Times To Refinance A Mortgage
Typically, the best times to refinance a mortgage are those that will net you large savings over the life of the loan. These circumstances include:
Market rates have dropped
Market interest rates rise and fall periodically, and whenever they reach a low, it’s often a good time to refinance. Depending on how long you have left on your mortgage, switching to a lower fixed interest rate can save you thousands over the life of the loan.
Your credit has improved
Another way to save on your house payments is if you refinance after improving your credit. As you make monthly payments on time, you’ll build credit, and over time, that could qualify you for better terms. Doing so can save on interest while also potentially lowering your monthly payments, making them a bit more affordable.
You can afford higher monthly payments
On the other hand, if you have much more income than you did at the start of your mortgage, you can pay it off sooner by refinancing to a higher monthly payment. You might be able to do this if you have paid off another debt (thereby freeing up existing income) or simply have larger paychecks to work with.
Other Circumstances That May Warrant Refinancing
Additionally, it may be worthwhile to refinance if you:
- Need lower monthly payments
- Want to switch from a variable rate loan to a fixed-rate mortgage
- Want some extra cash from cash-out refinancing
All of these can be beneficial, but it’s generally best to time them with the favorable circumstances listed above if at all possible.
When It’s Best Not To Refinance
Refinancing can be beneficial, but it’s very situational. Times when it’s often best not to refinance include the following.
You plan to sell the house
If you’re planning to live in your house long-term, then refinancing can be beneficial. However, selling the house would likely cut those benefits short. Often, the benefits are reduced total interest over the life of the loan, so if you sell your house after five or six years, refinancing won’t do very much for you.
Market rates have gone up
In addition, if market interest rates have increased since you started your mortgage, refinancing is unlikely to be all that advantageous. In some cases, it might be balanced out by improved credit, but the change in your credit score would have to be fairly substantial to accomplish that.
Your current mortgage is almost paid off
Finally, if you have been paying off your mortgage and only have a few years left, you won’t save very much on interest if you refinance now. In some cases, the fees associated with the approval process might actually be more than the amount of interest you’d save by refinancing.
Determining The Value Of Refinancing
Ultimately, the value of refinancing is based on comparing savings to costs. Some of the factors you’ll want to look at include the following.
If the amount of interest saved over the life of the loan would be more than the loan’s closing fees, then it’s typically best to refinance. Essentially, the amount saved depends on four factors, which are:
- Drops in the market rates
- Your credit score
- Your lender
- The amount of time left on your loan
Increased ability to pay
If you can afford a higher monthly payment and can pay off your loan early, you’ll likely save interest. Again, the amount of interest you’d save depends on current rates, your credit score, your lender, and the number of months you have left to pay versus the term (length) of the new loan.
Paying off your debt
Some benefits are harder to quantify. Paying off a mortgage in full is extraordinarily rewarding, and it will mean you have an easier burden to carry from month to month as well. It can free up extra funds for other expenses, which ultimately means more financial freedom for you overall.
If refinancing helps you pay off your loan sooner or if it makes it easier to get it paid off, then it is worth it to refinance your mortgage.
Balancing out associated fees
When calculating whether it’s worthwhile to refinance, be sure to take closing costs into account. Typically, these come out to 2% to 5% of the loan amount, so your new loan should save you at least that much in total.
Determining If It’s Worth It To Refinance Your Mortgage
While figuring out if refinancing is right for you may seem a little arcane, it doesn’t have to be. There are plenty of online mortgage calculators available to help you. Just enter the amounts and determine if refinancing is truly worth it.