Short answer: Consider refinancing when a new mortgage could help you meet a specific goal and the expected benefit justifies its costs. A lower advertised rate alone does not answer the question. Compare the new loan’s payment, closing costs, term, and total cost with the mortgage you already have.
First, decide what you want to change
Homeowners refinance for different reasons. You may want to lower your monthly payment, pay off the mortgage sooner, move from an adjustable rate to a fixed rate, or access some of your home equity. Each goal calls for a different comparison.
For example, a shorter loan term may raise your payment while reducing the interest you pay over time. A longer term may ease the monthly payment while increasing the total amount you pay. Cash-out refinancing can provide funds, but it also increases your mortgage balance and reduces the equity left in your home.
Write down your goal before comparing offers. That makes it easier to tell whether a proposed loan actually solves the problem you have.
What would the new loan cost?
A refinance replaces your current mortgage with a new one. That new loan may bring lender charges, discount points, appraisal or title expenses, and other closing costs. Ask how much you would pay up front and whether any costs would be added to the loan balance or offset by a higher rate.
When you apply, the lender provides a Loan Estimate showing the proposed loan terms, estimated payment, and closing costs. Compare Loan Estimates for the same loan purpose and similar terms. Review the interest rate and APR, but also look at the loan amount, monthly payment, costs at closing, and what you would pay over the period you expect to keep the mortgage. The Consumer Financial Protection Bureau explains how to read a Loan Estimate.
How long would it take for savings to cover the costs?
Here is a simple hypothetical check. Suppose a refinance would cost $5,000 paid up front and lower your monthly principal-and-interest payment by $150, with the same loan balance and remaining term. Dividing $5,000 by $150 suggests roughly 34 months to recover those up-front costs through the lower payment.
That is a starting calculation, not the complete decision. If you expect to sell or refinance again sooner, you may not keep the mortgage long enough to recover the cost. If the new loan extends your term, finances the closing costs, changes mortgage insurance, or changes the amount you borrow, compare the full payment schedule and remaining balance as well.
Is the lower payment coming from a longer term?
This is the detail many homeowners miss. Imagine that you have 22 years left on your current mortgage and refinance into a new 30-year loan. The monthly payment could fall partly because you would make payments for eight additional years. You could pay more overall even if the new interest rate is lower.
Ask to compare a new term close to your remaining term with any longer-term option. Look at the monthly payment and the estimated total cost of each. The CFPB’s refinancing guide explains this tradeoff.
Could refinancing still serve another goal?
Sometimes the goal is greater payment certainty rather than immediate savings. A homeowner with an adjustable-rate mortgage might consider a fixed-rate loan before the payment changes. Another homeowner may prefer a shorter term and accept a higher monthly payment to pay the mortgage off sooner.
If you need to use equity, compare a cash-out refinance with other available ways to borrow against the home. Replacing a favorable first mortgage is a different decision from keeping it and adding a separate loan or line of credit. Compare the payment, combined debt, fees, and risks of each option; availability and terms depend on your circumstances.
Five questions to ask before you refinance
- What specific goal will the new mortgage accomplish?
- What are the total closing costs, and how will I pay them?
- How do the new monthly payment, term, and total cost compare with my current mortgage?
- How long do I expect to keep this home and this mortgage?
- Does my current loan have a prepayment penalty, or would the new loan reduce my home equity?
The next step: Gather your current mortgage statement and any proposed Loan Estimates. Contact Future Home Loans to compare the options in the context of your goal. The right time to refinance depends on your numbers and the terms available to you.