Should Refinancing Your Mortgage Be on Your To-Do List in 2022?

Refinancing makes sense for some homeowners, but it’s not always the right choice.

Refinancing is a common technique used to change the terms of a home mortgage loan. It's a relatively simple process that involves applying for a new loan and then paying off your existing mortgage with the money from that new loan.

For many people, refinancing can save them money and simplify the process of paying off their house. But that doesn't mean refinancing is always the right choice. To help you decide if refinancing is a task you should accomplish in 2022, ask yourself a few key questions.

1. Can you reduce your mortgage interest rate?

The goal of refinancing is to save money on debt payoff. The best way to do this is to reduce the cost of borrowing by lowering your interest rate. If you can't qualify for a loan at a lower rate than what you have on your current mortgage, refinancing would make little or no sense in most circumstances. After all, why would you want to pay a new lender more for the privilege of borrowing than you're currently paying?

The one exception to this, however, is if you have an adjustable-rate mortgage (ARM) and you're worried rates will rise substantially over time. In these circumstances, while refinancing to a fixed-rate mortgage may cost you a little more in the short term if the rate is higher than your current ARM, you could end up saving over the long term by avoiding your mortgage rate floating even higher.

2. Can you cover the closing costs of refinancing?

When you refinance, you have to pay closing costs. These could equal around 2% to 5% of the amount you're borrowing. This means you're likely looking at several thousand dollars worth of upfront fees.

If you can't afford to pay them, you may want to put off refinancing until you can. Although some lenders tout no-closing-cost refinance loans, these usually either have higher interest rates or require you to borrow more and roll your closing costs into your loan balance -- both of which can make refinancing more expensive and less attractive.

3. How long would it take to pay off your current home loan vs. your new one?

Since refinancing means getting a new loan, the process could end up changing your mortgage payoff timeline. For example, if you have a 30-year loan you've been paying on for 10 years, you'd have just two decades left to pay back the outstanding balance. If you refinance into a 30-year loan, you've added on an additional 10 years.

This means you'll have a mortgage payment taking up monthly income for longer and will end up paying interest for much longer -- which could raise total borrowing costs even if you reduce your rate.

If you have a very short time left to pay back your loan, you may want to opt out of refinancing. And if you decide to go forward, you may want to choose a new loan with a payoff time that will allow you to become debt-free at around the same time as your current mortgage.

4. Will you be moving soon?

Because of the upfront costs of refinancing, it can take time for the savings provided by a lower rate to make up for the initial expenses you'll pay. If you'll be moving soon, then it may not be smart to refinance in 2022 since you might not live in the home long enough to realize any savings after factoring in closing costs.

By asking yourself these four questions, you can make an informed choice about whether refinancing in 2022 is the right move or if this task has no place on your 2022 list of financial goals.