Refinancing a mortgage is a great way to lower the interest rate on your home loan and reduce your monthly payment in the process. But when should you refinance your mortgage? Here's how to know.
When you do a mortgage refinance, you trade your current mortgage for a new one. That new loan may have a shorter or longer term (for example, you might switch from a 30-year loan to a 15-year loan, or vice versa), but also, your goal should generally be to lock in a lower interest rate.
Refinancing is generally a good idea when:
Keep in mind that refinancing won't always lower your interest rate. If you swap your 15-year mortgage for a 30-year mortgage, you could end up with a higher interest rate, but your monthly mortgage payment should also shrink because you'll be paying off your mortgage loan in half the time.
Refinancing could allow you to save money by locking in a lower interest rate on your mortgage, or by lowering your monthly mortgage payment with a longer loan term (for example, going from a 15-year loan to a 30-year loan). But it doesn't always pay.
You shouldn't refinance if:
Since the middle of 2020, mortgage rates, including refinance rates, have been sitting at or near historic lows. If you have solid credit and are a good refinance candidate, now could be a good time to refinance. But if the above circumstances apply to you, you may want to either hold off on refinancing or avoid doing so altogether.
As a general rule, you should only refinance if you can shave 1% or more off your interest rate. But refinancing to lower your rate by 1% is absolutely worth it. Say you have a 30-year fixed $100,000 mortgage at 3.85% interest. If you refinance at 2.85%, your monthly payment will go down by $55. And you'll save close to $20,000 in interest over the course of your repayment period.
If you're planning to stay in your home long enough to recoup your closing costs, you have strong credit, and you're able to shave at least 1% interest off of your mortgage, then refinancing makes sense. If you do so, you could save a lot of money each month and also spend a lot less on interest between now and when your home is paid off.
If you're going to refinance, it pays to shop around with different refinance lenders rather than accept the first offer you're given. You may find that one mortgage lender offers a better interest rate than another, or that one lender's closing costs are much lower. You can start the process by reaching out to your current mortgage company, but don't stop there -- get multiple offers to compare. You can also work with a mortgage broker to find a good deal on a mortgage refinance.
Finally, be sure to check out this refinance guide to learn more about what the process involves. It may help you get a new home loan and mortgage rate that serves your needs.
You should refinance your mortgage when you stand to gain something from doing so. That could be a lower interest rate on your home loan or a repayment term that works better for you.
Absolutely. Shaving 1% off of your interest rate could result in serious savings. That said, 1% is generally the minimum interest rate savings you should look for in a refinance.
You shouldn't refinance if you're not sure how long you plan to stay in your home, you're not likely to snag a great refinance rate due to having poor credit, or you can't lower your mortgage rate by at least 1% (possibly because you're paying a low rate to begin with).
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