Is refinancing worth it?
The decision to refinance is complex. Whether it makes financial sense depends on things like your age, tax bracket and how long you've been paying off your current mortgage.
To help you decide, ask yourself:
- How long do I want to live in my home?
- Why am I refinancing?
When you refinance, you agree to a new mortgage term. If you've already been paying down a 30-year mortgage for 10 years, refinancing to a new 30-year mortgage means you could be signing up for an extra 10 years of being in debt.
Also consider that you could face closing costs when you refinance — just like those you paid to finalize your original mortgage. If you don't plan to live in your home much longer, you might not be there long enough to recoup those costs with the money you’d save in interest.
However, if interest rates and your monthly payment are low enough, refinancing is usually a good move.
For example, say your current monthly mortgage payment is $1,500, but you can save $300 a month by refinancing. If your closing costs are $2,400, you could recoup that amount in eight months — and after that, you’d save $3,600 a year on mortgage interest. So unless you're planning to move within a year or two, it may make sense to refinance.
Even so, these days many mortgage lenders offer refinancing with no closing costs at all. So it can pay to shop around.
Should I refinance my mortgage now?
Say you've decided a refi is right for you. The next question is: Do you want a 30-year or 15-year mortgage?
The answer depends on your goals. For example, you might not like the idea of committing to many years of debt, so you’d prefer a 15-year mortgage. If you can handle slightly bigger monthly payments, that might be a more affordable choice than it used to be.
Another option is to get a lower-rate 30-year mortgage — but pay it off in under 30 years. Most mortgage lenders don't charge a prepayment penalty and will let you make extra payments toward the principal. Talk to your lender to see if you can get a lower-interest mortgage and pay it off faster than before (even if it’s technically a 30-year loan). Paying less in mortgage interest is almost always a good idea.