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Actions When to Refinance a Mortgage
Key takeaways
- Low interest rates make refinancing worth considering.
- You can cut your payment, pay off your home faster or get cash.
- Refinancing pays off if you can recoup closing costs within a year or two.
The Federal Reserve has cut interest rates to nearly zero due to the coronavirus crisis. That’s left many homeowners wondering, "Is now a good time to refinance my mortgage?"
Low rates give you the chance to lock in lower mortgage payments and save money on mortgage interest. But before you refinance, make sure you understand your options. Then find the right mortgage for your situation and goals.
Here are some key tips and insights to help you decide.
Why refinance a mortgage?
Refinancing gives you a chance to restart your mortgage loan (or what’s left of your balance) with a new, lower-interest loan. This can help you reach a variety of financial goals. Among them:
-
Lower your payment:
Refinancing into a lower-interest mortgage might substantially reduce your monthly mortgage payment. This could free up hundreds of dollars you can use to pay off other debts, save for retirement or use for other purposes. -
Pay off your home faster:
A “refi” can be an opportunity to switch from a 30-year mortgage to a 15-year mortgage. This lets you pay off your home and be free of your debt faster. (Note that a 15-year mortgage might have higher monthly payments than a 30-year mortgage.) -
Get cash out of your home:
By choosing a “cash-out” refinance option, you can borrow more than you owe on the home — and use the extra proceeds to pay for home renovations, pay off high-interest debt or invest in other financial goals. That’s like using your home equity — the difference between how much you owe and what your home is worth — to give yourself a low-interest loan.
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.
What you can do next
Check out the latest mortgage refinance rates at banks and credit unions. Learn what a 30-year, 15-year or cash-out refinance could mean for your goals. And talk to a financial advisor to help decide what makes the most sense for you.
Please consult your tax and legal advisors regarding your circumstances.
Footnotes
Ben Gran is a freelance writer based in Des Moines, Iowa. He writes about personal finance, public policy, financial services, technology, and business.
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