When to refinance your mortgage

Like many homeowners, your monthly mortgage payment can be the biggest expense on your list of financial commitments. Even with rising interest rates, you can still reduce your repayments by asking yourself one important question: Should I refinance my mortgage?

Should I refinance my mortgage?
With interest rates rising, now may not be the ideal time for many borrowers to refinance.

However, the math isn’t as simple as comparing the interest rate you set when you were approved for your mortgage to what you might be eligible for right now. Taking these three factors into consideration, Bill Packer, executive vice president and chief operating officer of mortgage lender American Financial Resources, recommends:

When is it a good idea to refinance your mortgage

In general, refinancing is a good decision if it saves you money, builds assets, and pays off your mortgage faster. It’s best if you can cut your interest rates by half to three-quarters and plan to stay home long enough to recoup your transaction costs.

Reasons for Refinancing

Lower interest rates: Interest rates and regular refinancing can offer you lower rates if interest rates have dropped since you first got your mortgage.

Consolidate high-interest debt: You can use cash refinancing to leverage your home equity and pay off or pay off high-interest debt like credit card balances.

Eliminate Private Mortgage Insurance: If your home increases in value, you can refinance to avoid paying private mortgage insurance (PMI).

So when is refinancing a bad idea? If you’re planning to move in the near future, refinancing may not be wise because you’ll have little time to recoup your costs.

However, the question of when to refinance isn’t just about interest rates or your schedule. This is to ensure your credit rating is good enough to qualify for the correct refinance loan. The best rates and terms apply to those with the highest credit ratings, so check your credit report to fully understand your risk profile. If you have a large credit card balance or have recently missed a payment, you may look like a riskier borrower.

For more information, see Bankrate’s guide to the best and worst reasons to refinance.

How much can I save by refinancing?

The amount you can save by refinancing depends on factors including your closing costs, and is usually between 2% and 5% of the loan principal. For example, if you borrow $250,000 and the closing cost is 4%, you will owe $10,000 on settlement.

Instead of requiring all the funds up front, many lenders let you put the closing cost into your main balance and fund it as part of the loan. However, keep in mind that adding these costs to the loan will only increase the total amount of accrued interest, which will end up costing you more.

You don’t get the benefits of refinancing until you hit break-even, and you save more than you spend on upfront costs.

You don’t get the benefits of refinancing until you hit break-even, and you save more than you spend on upfront costs. To determine your refinance break-even point, divide your closing costs by the amount you save each month for new payments.

Assuming that refinancing saves you $150 per month, the cost of closing a new loan is $4,000:

So if you close a new loan today, you will officially break even in two years and a little over two months. If you live for another five years after that, the savings really add up — $9,000 in total.

You can use Bankrate’s Refinance Breakeven Calculator to find out how long it will take to recover your mortgage refinancing costs. If you think you can sell the house before breaking even, then refinancing may not be worth it.

Example of Mortgage Refinancing

Let’s say you buy a $320,000 30-year mortgage at a fixed rate of 6.23%. Your monthly payment is $1,966. You will pay approximately $707,901 over the life of this loan, including $387,901 in interest.

Now suppose that after 15 years on the loan, you have paid $86,551 in principal and $257,499 in interest, and you want to refinance the remaining $233,449 in principal balance with a new 15-year fixed rate loan of 5.11%.

The new loan will reduce your monthly mortgage to $1,859 a month, adding an extra $107 to your monthly budget. During the term of the loan, you will pay $334,756, of which $101,307 is interest. Add in the $344,050 in principal and interest you paid on your previous mortgage, and your total cost is $678,806.

How long does it take to refinance a mortgage?

Refinancing a mortgage doesn’t happen overnight. The same work as your first mortgage – verifying your income, checking your credit and debts, appraising the property, underwriting and closing – applies here as well. As of April 2022, the average refinancing took 48 days, or about a month and a half, to complete, according to ICE Mortgage Technology.

Some lenders can close deals faster thanks to automated online processes. When looking at refinancing options, ask each lender what their average closing time is and the estimated closing cost you’ll have to pay.

Is refinancing worth it?

If it frees up money in your monthly budget or reduces the overall cost of the loan, refinancing is worth the work and money.

However, there’s no one right way to do it — there are multiple ways to refinance your mortgage. Maybe you want to switch from a variable-rate mortgage to a fixed-rate loan with a fixed monthly rate, or shorten your loan term from 30 to 15 years and save yourself a ton of interest charges. You can also easily switch from a 30-year mortgage to another 30-year mortgage with a lower interest rate.

Additionally, refinancing offers a way to get out of PMI after accumulating a 20% equity stake in your home.

Many homeowners opt for fixed-rate regular refinancing to lower interest rates and provide them with a comfortable repayment period. Some people want to pay a lower monthly fee to free up funds for other expenses, such as travel. B. Tuition or car loan.

While installment and term options can help you save money, paying for refinancing can help you borrow more money. With this approach, the new loan allows you to withdraw additional funds that can be used for other financial activities, such as ) or major renovation projects.

There are pros and cons to paying for a refinance, so you need to think carefully about what you want to do with the money to determine if you should increase the size of your home loan. By taking on more debt, you end up making paying off your mortgage more difficult and potentially more expensive.

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