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Is it Worth it to Refinance Right Now?
It’s generally worth it to refinance if you can lower your costs in some way, whether by getting a lower interest rate, a shorter loan term, or a cheaper monthly payment.
A lower interest rate means you’ll have lower monthly payments compared to your existing mortgage. And it often means you’ll save thousands (maybe tens of thousands) over the life of the loan.
But you have to weigh those savings against the inherent downsides of mortgage refinancing:
- You have to pay refinance closing costs on the new mortgage, which are typically 2%-5% of the new loan amount. These include origination and application fees, along with the legal and appraisal fees.
- You restart your loan term from the beginning, usually for another 30-15 years.
- If your new interest rate isn't low enough, you might actually pay more interest in the long run because you pay it for a longer time.
Plus, most people don’t stay in their homes long enough to pay their mortgages off. So, you should make sure the savings you calculate are realistic. Account for the amount of time you plan to keep your mortgage and the upfront cost of refinancing.
Other Good Reasons to Refinance (besides a lower rate)
Most people who refinance their existing home loans want to save money by getting a lower monthly payment and a lower interest rate. But there are other reasons to refinance. While your new mortgage should save you money, there are several ways a loan can do this — and they don’t always include a lower rate:
- Refinance an adjustable-rate loan into a fixed-rate loan.
- Drop mortgage insurance premiums.
- Tap home equity.
- Shorten the loan term.
When is Refinancing Not Worth It?
It’s important to remember that refinancing starts your loan term over. That means you’re spreading the remaining loan principal and interest repayment over a new 30-year or 15-year loan term. This has big implications for the long-term cost of your new loan. As such, refinancing might not be worth it if:
- You've been paying your original loan for quite some time.
- Refinancing results in higher overall interest costs.
- Your credit score is too low to qualify for a lower rate.
The bottom line? It’s a good time to refinance when your savings are greater than the cost.
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