Should I Refinance My Mortgage if My Interest Rate Is Already Low?

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Refinancing could lower your mortgage's interest rate -- but that's not all.


Key points

  • Borrowers who refinance generally want to lower the interest rate on their mortgages.
  • In some cases, it could pay to refinance even if your interest rate won't drop all that much.

Over the past year and change, many homeowners have rushed to refinance their mortgages in order to take advantage of record low interest rates. If you haven't refinanced yet, you may be thinking of swapping your existing home loan for a new one with a lower rate attached to it.

But what if you already have a low interest rate on your mortgage? Does seeking out a mortgage lender and refinancing still make sense?

It's more than just lowering your loan's interest rate

It's true that for many people, the goal of refinancing is to lower the interest rate they're paying on their mortgage and slash their monthly payments. In fact, the general convention is that refinancing makes sense when you can lower your interest rate by about 1% or more. But if you have a low rate to begin with, that may not happen.

Still, there are other scenarios where refinancing can pay off even if the interest rate on your mortgage doesn't change all that much.

When you want more time to pay off your mortgage

It may be the case that you signed a 15-year mortgage thinking you'd make those higher monthly payments to shed your housing debt sooner. But if your other living expenses have risen since you moved in, and you're now having trouble keeping up with your mortgage, then it could pay to refinance from a 15-year mortgage to a 30-year mortgage. In that case, you may not get much or any interest rate savings, but you should shrink your monthly payments substantially.

When you want to take cash out of your home

Because home values have soared over the past year, a lot of property owners are now sitting on more home equity. A cash-out refinance is a good way to tap that equity and use it to your benefit.

With a cash-out refinance, you borrow more than your existing loan balance and get the rest in cash. You can then use that cash for any purpose, whether it's to pay off credit card debt, renovate, or take a vacation. Even if you can't lower your loan's interest rate a lot (or at all), a cash-out refinance could still be an affordable way to borrow, and an easy way to access the money you need.

Look at the big financial picture

For many homeowners, refinancing presents an opportunity to snag a much lower interest rate on a mortgage. But if you have a low interest rate already, the same may not apply to you.

If your sole purpose in refinancing is to lower your monthly mortgage payments, then swapping your current loan for a new one may not produce the savings you want if you have a low interest rate already. That's because you'll pay closing costs to finalize your new loan. If you're only able to drop your interest rate down a little bit, you might, for example, pay $5,000 in closing costs to save $50 a month on your mortgage. That means it'll take you 100 months to break even, and in that time, you might move, thereby wiping out the potential for savings.

On the other hand, if you need to extend your mortgage term or want to take cash out of your home, then refinancing could make sense even if your interest rate will mostly stay the same. It pays to look at the big picture when making your decision.

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