When is it worth it to refinance a mortgage?
Wondering when to refinance a mortgage? As a homeowner, there are specific times when refinancing may benefit you—such as when interest rates have fallen, if you’re eligible to drop your monthly mortgage insurance or if you’d like to change your loan terms, among others. In this article, we’ll break down when refinancing can be a smart move.
When to refinance a mortgage: 6 helpful indicators
When you refinance a mortgage, you apply for a loan all over again using your credit score, income and debt-to-income ratio. Just like when you bought your house, there will be closing costs and other fees attached. Closing costs may range from 3 to 6 percent of the loan amount.
A mortgage doesn’t always get better with age. As internal or external factors change, the mortgage you started with may no longer fit your life. Currently, “highly qualified” borrowers (those with a high credit score and left with at least 20 percent equity post-refinance) who purchased in the last two years could save as much as $300 a month by refinancing.
Here are some examples of when to refinance a mortgage:
| Reason | Benefits | Considerations |
|---|---|---|
| Interest rates have gone down. |
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If current rates are at least 1 percent lower than your mortgage interest rate, you may save on your monthly payment. |
| Your home value has increased. |
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You may have higher monthly payments due to the increased loan amount. |
| You want to shorten your loan term. |
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You’ll agree to pay higher monthly payments over a shorter loan term, saving significantly on interest over the life of your mortgage. |
| You want to switch from an adjustable to a fixed rate. |
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Refinancing to a fixed rate may help prevent monthly payments from fluctuating once an adjustable-rate mortgage (ARM) resets. |
| Your credit score has gone up. |
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If your credit score has improved significantly since you bought your house, you may qualify for a more competitive interest rate. |
| You’d like to drop mortgage insurance. |
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If current rates are at least 1 percent lower than your mortgage interest rate, you may save on your monthly payment. |
Is one of these options right for you? Get in touch to find out.
What is your refinance break-even point?
To decide when to refinance a mortgage, it helps to consider the costs. You’ll need to factor in closing costs and calculate your break-even point, which is the point at which you start to recoup these expenses.
You can use this calculator or the formula below to estimate when you’ll break even:
- Divide the closing costs to refinance by the estimated monthly savings.
- This will tell you the number of months it will take to break even.
- Example: $4,000 in closing costs/$300 in estimated monthly savings = 13 months to break even
If you plan to stay in your home for longer than the break-even period, the financial benefits of refinancing are more likely to outweigh the upfront costs.
How soon can you refinance a mortgage?
How soon can you refinance your house after you purchase? Generally, six months of payments are required on your current loan before you can qualify to refinance. This waiting period is often a requirement for most loan programs. However, the exact timing can vary based on specific loan guidelines.
If you’re thinking about refinancing soon after buying a house, there are advantages and disadvantages to consider:
| Pros | Cons |
|---|---|
| Save on interest: If rates have dropped since your loan closed, you could potentially save on interest and lower your monthly payments. | You may not recoup your costs: Refinancing can carry most of the same fees as your initial mortgage. Knowing when you’ll break even can help you determine if it’s worth the cost. |
| Take advantage of better credit: If your credit score has improved since you closed, you may qualify for a lower interest rate. | Your credit score may temporarily be lower: Refinancing involves a hard credit inquiry, which can cause a credit score dip. But this impact is usually minimal and lasts only a few months. |
| Account for higher income: If your income has increased since you closed, you might qualify for a shorter-term loan with a lower interest rate. | There may be penalties: Some loans have prepayment penalties that make refinancing more expensive. Ask your loan officer if your mortgage has any such penalties. |
How many times can you refinance a house? There's no limit. You can refinance as often as you'd like, if you meet your lender's requirements. But refinancing multiple times may not be the wisest choice. Your loan officer can help you decide when refinancing is the best course of action.
Let’s explore what’s possible
It isn’t just about buying a bigger house or cashing out on the equity you’ve gained. It’s about fine-tuning your mortgage so that it fulfills your plan for your life. Want to see what’s possible? Reach out.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.
By refinancing an existing loan, total finance charges may be higher over the life of the loan.