My Perfect Mortgage
Is It Worth It to Refinance? Exploring The Right Time
7 minute read
January 13, 2022

There is no shortage of reasons to consider refinancing your mortgage. 

From lowering your interest rate to lowering your monthly payment to reducing your term, you don’t have to look far to find a reason that suits you. 

But that doesn’t mean you should dive in headfirst without crunching the numbers with the goal of making an informed decision. 

In other words, refinancing is not the right decision for everyone. You need to answer the question “is it worth it to refinance?”

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How Does Refinancing a Mortgage Work?

Refinancing a mortgage is the process of buying out your current loan with a new loan. 

This is common among people who are interested in securing a lower interest rate, such as when rates are at or around all-time lows.

For example, if you closed on your loan in 2019 when interest rates were around 4.5%, you may consider it worth it to refinance now that average rates are much lower.  

While you may have the option to refinance through your current lender, it’s not a requirement. You have the right to shop for your own lender. 

When Should I Refinance My Home?

Your home is one of your biggest investments, so choosing a mortgage is nothing to take lightly. 

It’s important that you know when to consider refinancing your loan, as well as when it’s best to hold off.

Below, we outline several instances in which you should at least learn more about refinancing. As you collect additional information pertinent to your personal finances, you can decide what comes next. 

To Get a Shorter Term

Despite the fact that a shorter term will generally result in a higher monthly payment, you’re actually saving money over the long run by paying less interest over time. For example, if you have 25 years left on a 30-year mortgage, you could refinance down to a 15-year loan

After you run the numbers, you can accurately answer questions such as:

  • How much will your monthly payment increase?
  • Does the new monthly payment fit into your budget?
  • Can you secure a lower interest rate by reducing your term?
  • How much will you save in interest over the life of your loan?

A shorter-term sounds like a good idea — as it allows you to pay off your loan sooner — but it must fit into your monthly budget. 

To Secure a Lower Interest Rate

Maybe you have a loan with a high interest rate because your credit score was less than desirable when you purchased your home. Or perhaps this is the case because rates were generally high at that time.

Regardless of the reason, the opportunity to secure a lower interest rate may make it worth it to refinance. 

As a general rule of thumb, consider refinancing if you can lower your interest rate by one percent or more. This allows you to quickly recuperate the money you put out for closing costs. 

To Lower Your Monthly Payment

For most homeowners, their mortgage is their biggest monthly obligation. It’s only natural to want to keep this payment as low as possible. 

There are two ways to lower your monthly payment by refinancing:

  • Extend your term: For instance, if you have 15 years left on your original 30-year mortgage, you could refinance to a new 30-year loan. Yes, you’re starting back at square one, but you’ll significantly lower your monthly payment due to a smaller balance. 
  • Secure a lower interest rate: The lower the interest rate, the lower your monthly payment. Request a rate quote from three to five lenders to determine if refinancing is worth the time and cost. 

To Switch to a Fixed Rate Mortgage

There are pros and cons of an adjustable rate mortgage, and your feelings depend heavily on what’s happened to date. 

If your rate has adjusted downward, you’re probably happy with your loan. Conversely, if your rate has increased, you’re more likely to be seeking a change.

Refinancing allows you to switch from an adjustable rate mortgage to a fixed rate mortgage. This leaves you with the same interest rate for the remainder of your loan, which isn’t subject to changes in the market.

To Access Cash From the Equity in Your Home

If you have equity in your home, refinancing is one of the best ways to access it. 

A cash-out refinance allows you to take a portion of your equity in cash, without the burden of another loan or line of credit. 

You can use this cash however you best see fit, such as to consolidate debt, pay off debt, or to remodel your home.

To Get Rid of Private Mortgage Insurance (PMI)

If you didn’t put down a minimum of 20 percent when you purchased your home with a conventional loan, you’re paying Private Mortgage Insurance every month. And until you reach this threshold and have your home appraised, you’ll continue to do so.

By refinancing, you have the potential to get rid of PMI and the payment that comes along with it. If you’re refinancing for this reason, you must be confident that the appraisal will show that you have a minimum of 20 percent equity in your home. 

When is Refinancing Not Worth It?

Even with so many benefits — as noted above — it is not always worth it to refinance. 

There are situations in which you’re better off sticking with your current loan. The following are some times when you should stand pat. 

If It Will Increase Your Total Interest Paid

Even if you’re able to lower your monthly payment by refinancing, you may soon find that you’re paying more in interest over the life of your loan. 

If you absolutely need a lower payment — such as to afford other monthly expenses — this is okay. But if not, you should strongly consider how much you’ll pay in interest with your current loan vs. a new loan. 

If You’re Close to Paying Off Your Home

The closer you get to paying off your home, the less sense it makes to refinance your mortgage. Doing so is often not the best financial decision, as you’ll pay closing costs that bite into your savings. 

Also, there can be a lot that goes into refinancing your mortgage. With a minimal amount of time left to pay on your loan, it may not be worth the time and energy that the process requires. 

If Your Credit Score is Low

If your credit score is low, you’re not likely to qualify for a more competitive interest rate. In fact, you may find that lenders are quoting you at a rate that’s higher than what’s currently attached to your loan.

Of course, since it doesn’t cost anything but a few minutes to obtain a rate quote, there’s no harm in learning more. If nothing else, it shows you “where you’re at” so that you can take steps to improve your score. 

If You Don’t Want to Pay the Closing Costs

Just the same as your original mortgage, there are closing costs associated with refinancing. Common fees include:

  • Home insurance
  • Property taxes
  • Escrow and title fees
  • Appraisal fees
  • Credit fees
  • Lending fees
  • Origination fees
  • Interest rate discount fees

Even if you’re able to save money over the life of your new loan, you may not be interested in paying closing costs upfront. 

Final Thoughts

Every year for the past 20 years, refinance mortgage originations in the United States have reached well into the hundreds of billions of dollars. 

For example, in quarter one of 2021, refinance mortgage originations were $774 billion. 

With numbers like these, it’s easy to see that you’re not the only person wondering if it’s worth it to refinance your mortgage. If you’ve decided that it’s time to learn more about refinancing — and possibly take action — you’re in the right place. 

Use My Perfect Mortgage’s simple, streamlined online system to connect with a lender (or lenders) who can answer your questions and provide the guidance you need to proceed with confidence.

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Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.