When Should I Refinance My Mortgage?

By: Steve Swenson, Mortgage Loan Originator

Posted on 6/19/2019 5:00:00 PM

Refinancing your mortgage can help you save money by securing a lower interest rate, but how do you know when it’s the right time to refinance a mortgage? Here are a few questions to ask and things to consider to determine when you should refinance your mortgage:

Check on Current Mortgage Rates

In order for a refinance to save you money, you’ll need to secure a lower interest rate. The first step to take before considering a refinance is to check on current interest rates and then refinance your mortgage when interest rates are low.

Compare the Cost to Your Monthly Savings

From closing costs to early payoff penalties, there are costs associated with refinancing your mortgage, so make sure you’ll actually be saving money before making anything official. Calculate what your new monthly payment will be, and then compare your savings to the associated costs.  

Are You Going to be Moving Anytime Soon?

If you’re going to be moving soon, it might not be the right time to refinance. Make sure to consider the closing costs of a new home first. Calculate how long it will take to break even on those costs compared to the money you’ll save for a refinance. For example, if your refinance will save you $150 a month, compare that to closing fees of $7,000, which would take over 45 months to build up via your savings from the refinance. 

How Long Have You Had Your Mortgage?

Interest rates are typically frontloaded on home loans, which means if you haven’t owned your home for very long, your payment is still comprised mostly of interest. Refinancing could mean tacking on more interest payments, which could end up costing you more rather than saving you money. 

Consider Changing Your Loan Type

Depending on your current loan type, it might be a good idea to refinance and change your loan type. For example, if you chose an adjustable-rate mortgage and are nearing the loan terms where your rate is about to adjust, you could potentially save money by switching to a 20 or 30-year fixed rate mortgage. Also, if you have an FHA loan, refinancing could remove the MIP (mortgage insurance premium).  

Is Your Credit in Good Shape?

If you’ve been repairing less than ideal credit and your credit score and payment history has improved, then you’ll likely qualify for better loan terms. Likewise, if you’ve incurred some debt or failed to make payments on time, and your score has dropped, refinancing could land you an even higher interest rate. 

Has Your Home Increased in Value?

It’s usually a great time to refinance if you’ve invested in improving the value of your home. If the value of your home has increased, you may have enough equity to finance repairs, additions, and improvements.

To learn more about Steve, you can read his bio on our Mortgage Champions page. You can also contact him directly through our Mortgage Resource Center.