Should I refinance my mortgage?

Written by Dori Zinn / December 19, 2022
Reviewed by Jamie Young

When you refinance your mortgage, you take out a new home loan to replace your current one. This loan will come with different repayment terms and a new interest rate and depending on where you refinance, you might even have a new lender. 

However, refinancing might not always make sense for everyone so before you decide to refinance your mortgage, here’s everything you should consider.

Inside this article

  1. When to refinance your mortgage
  2. When not to refinance your mortgage
  3. How to refinance your mortgage

When to refinance your mortgage

There are many different reasons to refinance your mortgage. Some homeowners might do so to lower their monthly payments while others are looking for a way to pay off their mortgage sooner. Here are some common scenarios when refinancing might be a good idea.

1. You can get a lower monthly payment

If you’re struggling to make your payments every month or just need some breathing room, refinancing to get a lower monthly payment could be a smart idea. If you’ve had your loan for a few years and refinance your mortgage into a new 30-year term, your monthly payments will likely be lower than what they are right now. 

Securing a lower interest rate could lower your monthly payments as well. You could also extend the length of your loan term to get a lower monthly payment just keep in mind that this will likely mean paying more in interest over the life of the loan.

2. You can secure a lower interest rate

A lower interest rate is one of the best reasons to refinance your mortgage. This is because it means potentially reducing your monthly payment and paying less in interest over the life of your loan. And remember: Typically, the higher your credit score, the lower your rate. So work on improving your credit before applying.

Tip

Doing the math before refinancing can really pay off—if you can get more than a 1% reduction on your interest rate, it might be worth refinancing. If not, consider how much you'll save with your expected new interest rate to decide if refinancing is worth it.

3. You can get rid of mortgage insurance

If you buy your home with less than 20% down, conventional mortgage lenders require you to also purchase private mortgage insurance (PMI). You can get rid of mortgage insurance once you have 20% equity in your home. If your home value has risen, refinancing could remove PMI requirements—and in turn lower your total monthly payment.

4. You can change your interest type

If you have an adjustable-rate mortgage (ARM), you can move to a fixed-rate mortgage (or vice versa). If interest rates are dropping, securing a low, fixed rate might help you in the long run if rates start going up again. But do your research before committing to a fixed or adjustable rate to decide which is best for your situation.

5. You can change your terms

Refinancing to a shorter term could help you pay off your loan more quickly. On the other hand, refinancing to a longer term can mean getting more time to pay off your loan and lowering your monthly payment. However, remember that choosing a longer term means paying more in interest over time.

Keep in mind that if you can’t get a lower interest rate than what you currently have, but still want to pay off your loan sooner, you can make larger monthly payments or a few extra payments a year to pay off your loan sooner.

When not to refinance your mortgage

Refinancing doesn’t always make sense for everyone. Because circumstances are different based on the borrower, lender, terms and more, there are some instances when you probably shouldn’t refinance your mortgage.

1. You can’t secure a lower interest rate

Without a lower interest rate, it might not be worth refinancing. If you refinance into a higher interest rate, that means larger monthly payments and more interest paid over the life of your loan. If you refinance at the same (or close to the same) rate, the costs of refinancing could also still outweigh any benefit.

2. You’re moving soon

If you plan to move in the coming months, refinancing won’t save you too much. When you refinance, lenders charge closing costs just like with a regular home purchase loan. With these additional expenses, you likely won’t be saving much by the time you plan to sell your home. 

3. The cost outweighs the benefit

Closing costs are a big factor when refinancing. Ultimately, they could add up to be more expensive than you might anticipate. So before you consider refinancing, compare the closing costs—typically 2% to 6% of the loan amount—to the savings you’d get from a new rate to find out if it’s worth it.

Pros of refinancing a mortgage

  • Lower interest rate: If you bought your home when interest rates were high and they’ve gone down significantly, refinancing could save you a lot of money overall. The lower your interest rate, the less you’ll pay in interest over the life of your loan.

  • Lower monthly payment: If you refinance to a longer term, you could lower your monthly payment. A smaller monthly payment could give you the chance to save more for emergencies or pay off other debt

  • Switch to a fixed or adjustable rate: When you refinance, you can switch to a different type of mortgage rate. If you have a fixed-rate mortgage, you could refinance into an ARM or vice versa. For example, you might consider refinancing an ARM into a fixed-rate loan so that you have a consistent interest rate and know what to expect with your payments.

Cons of refinancing a mortgage

  • Higher interest rate or monthly payment: If you refinance your mortgage without any significant reduction in your interest rate, you could end up paying more than you originally were. A higher interest rate generally means higher monthly payments.

  • Overall cost: Closing costs range from 2% to 6% of the loan amount. With closing costs and other fees, the expense of refinancing could be higher than your savings with a new loan. In this case, it might not be worth refinancing.

  • Affects your credit: When you apply for refinancing, the lender will perform a hard credit check to determine your creditworthiness. This can cause your credit score to drop slightly, though this is usually only temporary. If you plan to finance a large purchase in the coming months, like a new car, refinancing now could mean getting a potentially high interest rate later on another loan because of your lower score.

How to refinance your mortgage

If you’re ready to refinance your mortgage, follow these steps:

  • Check your credit score. Your first stop should be checking your credit score and credit history. This will give you an idea of whether lenders will consider you to be creditworthy. Additionally, the higher your credit score, the more likely you are to qualify for the lowest interest rate available.

  • Examine your equity. If you have at least 20% home equity, you could end up dropping any PMI payments you have. How much equity you have could also determine which lenders you qualify to refinance with, too.

  • Compare lender rates and fees. Be sure to compare several different lenders based on interest rates, repayment terms and fees as well as other costs and perks. Know the fees you’re expected to pay so the overall loan cost doesn’t come as a surprise.

  • Prepare your paperwork. Once you have a lender in mind, you’ll have to get your paperwork in order. Like a traditional home loan, you’ll need to have tax returns, pay stubs, bank statements and other documents ready for your lender. 

  • Get an appraisal. A home appraisal is usually required for refinancing so lenders know exactly how much your home is worth. While the lender will typically arrange for the appraisal, you as the borrower will be responsible for the fee, which will generally be part of your closing costs. You can generally expect to pay $300 to $400 for a single-family home or up to $600 for a multi-family unit. 

  • Finalize closing. Once the appraisal is complete, you should prepare to pay closing costs and fees. Then, be on the lookout for communication from your new lender that details your monthly due date and how to make payments.

About the Authors

Dori Zinn

Dori Zinn

Dori has covered personal finance for more than a decade. Her work has appeared in the New York Times, Forbes, CNET, TIME, Yahoo, and others.

Full bio
Jamie Young

Jamie Young

Jamie Young is an authority on personal finance who has been writing and editing for online media for 10 years. Her work has appeared on some of the best-known media outlets including Forbes, Time, CBS News, Huffington Post, Business Insider, AOL, MSN, and more.

Jamie is passionate about finance, technology, and the Oxford comma. In her free time, Jamie takes care of her two crazy cats and ever-growing collection of plants. She’s also an avid gamer who watches way too many true crime documentaries. 

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