A home refinance might mean lower monthly mortgage payments, or spending thousands of dollars less in interest over the life of the loan. It could also help you own home outright sooner than you would with your original mortgage—but that’s not always the case. Ask yourself these four important questions to decide if a home refinance might benefit your financial life.
How Does My Current Mortgage Interest Rate Compare to the Refinance Rate I’ll Qualify For?
To see adequate cost savings from a home refinance, you'll want the interest rate on a refinanced mortgage to be less than the current rate. In some cases, an interest rate difference of just .25% could have a money-saving impact for homeowners with particularly large loans.
If you have an adjustable-rate mortgage and want the peace of mind that your mortgage interest rate/monthly payment amount won’t change at some point, refinancing into a fixed-rate mortgage could also provide you with a greater sense of financial control.
As you're shopping mortgage refinance interest rates, remember that advertised refinance rates may only apply to borrowers with an excellent credit score, a certain debt to income ratio, and for certain loan types. Additionally, your actual potential cost savings can depend on factors like how much equity you have in the home, how long you intend to stay in it once you refinance, closing costs and fees associated with the loan, and how much principal you originally borrowed. Know where you stand by running your numbers through a mortgage refinance calculator like this one.
Do You Want to Lower Your Monthly Payment or Pay Off Your Loan Sooner?
Refinancing your mortgage loan means entering into an entirely new loan agreement. This can mean a new loan duration and/or a new interest rate, but it's important to understand what you’re trying to accomplish with a refinance before you decide it's the right choice.
If Your Goal Is to Lower Monthly Mortgage Payments:
Consider a longer loan term than your current mortgage. You may pay more in interest over the life of the loan and it may take you longer to pay off your mortgage, but it can provide you with more financial flexibility each month. With that in mind, however, remember that significantly lowering your monthly payment with a longer loan term may increase the total cost of owning your home, over the long term.
If Your Goal Is to Expedite Paying Off a Mortgage and/or Reduce Interest:
Consider refinancing into a mortgage loan with a shorter duration than your current loan. Your monthly mortgage payments may be higher, but the mortgage interest rate may be lower. As long as you are confident you can afford the higher monthly payment, a shorter loan term could mean owning your house outright sooner and paying less money for your home overall.
How Long Will You Stay in Your Home After Refinancing?
Experts at Forbes explain that you can assume that about 81% of your first mortgage payments go only towards interest on your loan during the first few years you own your home. If you recently bought your home and have made only the monthly payment amount due, your mortgage balance may not have decreased much since you purchased it. If you refinance every few years, it could be difficult to pay down much of you loan balance and in fact, experts at Bankrate say refinancing may not offer any financial benefit if you plan to move in the next couple of years, given what you'd likely pay in closing costs and fees.
Are You Comfortable with the New Terms and Fees Associated with Refinancing?
The fees and closing costs lenders charge for a mortgage refinance vary, but it’s important to consider the impact these expenses have on the overall loan cost so you don’t negate the potential savings you could realize with a lower interest rate or a different loan term. Shop around to understand what closing costs lenders you're considering charge, but Bankrate says you can typically expect closing costs to be a total of two to five percent of the principal amount of the loan.