Should I refinance my mortgage now?

When interest rates go down, deciding whether or not to refinance your mortgage is often an easy decision. But in a rising-rate environment, you might be asking yourself, "Should I refinance my mortgage now, or wait until rates go down again?"

The answer largely depends on your situation. Before you refinance your mortgage, you should consider a few factors.

• Is now a good time to refinance?
• Why should I refinance?
• How much does it cost to refinance?
• How long does it take to refinance?
• When should I refinance?

Is now a good time to refinance?

In general, a mortgage refinance is a smart move if it'll save you money. You should consider this strategy if it can lower your interest rate by at least 1%.

Let’s say you’re five years into a 30-year, $250,000 mortgage with a 4.25% fixed mortgage rate and monthly payment of $1,229.85. By refinancing to a new 30-year loan with a 3.25% rate, you can lower your payment by over $241, which would save you more than $11,003 over the life of the loan.

Why should I refinance?

When you refinance, you may be able to save on interest, pay off your home loan sooner, change to a different loan type, or tap into your home equity. It’s important to figure out your main goals before you apply.

Save on interest

If you qualify for a lower interest rate, you can save on interest and lower your monthly mortgage payment at the same time. Before you refinance, do the math to figure out the interest costs on your current loan and the new mortgage.

Pay off your loan sooner

By refinancing to a shorter term loan, you can own your home free and clear sooner. Paying off your mortgage allows you to focus on other financial goals, like retirement or college savings. While your monthly payments will likely go up because you’re paying off debt within a shorter time period, you can save a significant amount on interest over the long term.

Change to a different loan type

You can also refinance an adjustable-rate mortgage (ARM) to a fixed-rate loan, or vice versa. If you refinance to a fixed-rate loan, you won’t have to worry about interest rate hikes, which can make it easier to budget for your payments.

On the flip side, moving from a fixed-rate loan to an ARM might be worthwhile if rates are going down and you don’t think you’ll stay in your home for long.

SHOULD I REFINANCE MY ADJUSTABLE-RATE MORTGAGE NOW?

Tap into home equity

Through a cash-out refinance, you can tap into your home’s equity, just like you would with a home equity loan or home equity line of credit (HELOC). With a cash-out refinance, you take out a new mortgage for more than your current balance and pocket the difference. While you’ll have a larger mortgage balance, you can put the excess cash toward things like home improvements or student loan debt.

How much does it cost to refinance?

Refinancing will cost you money. But depending on your situation, it can be worth it. If you do choose to refinance, you’ll be on the hook for closing costs, which include fees for processing your loan, conducting a home appraisal, and more. Closing costs will likely run you between 2% and 5% of the total loan amount.

Here’s an overview of the fees you can expect when refinancing:

• Loan origination fee — The origination fee is designed to cover the costs to process, underwrite, and close your mortgage. You’ll typically pay between 0.5% to 1.5% of the total loan amount.
• Appraisal fee — You’ll need a home appraisal to determine how much your property is worth. Appraisals usually range from $300 to $500.
• Title insurance fee — This fee is for a new title insurance policy, which you’ll have to purchase if you refinance. The average cost is $1,000 but will depend on your location and loan amount.
• Credit report fee — Lenders will pull your credit to see how much of a risk it is to lend to you. The credit report fee is usually less than $30. Some lenders may waive this fee.
• Prepaid interest charges — Your lender may ask you to pay the first month’s interest upfront when you close on your new mortgage. The timing of your close and interest rate will determine the amount you’ll pay.
• Recording fee — The recording fee, which varies by location, covers the cost of recording your home in its county.
• Mortgage points — In some cases, you’ll have to pay for "additional points" to land a lower interest rate. One point is equal to 1% of the loan amount, so if you have a mortgage for $400,000, a point would be $4,000.

Some lenders also offer no-closing-cost refinance loans to those with current mortgages. This is when the lender rolls the closing costs into your mortgage loan amount, allowing you to pay them over time instead of upfront.

How to know when you’ll break even

The break-even point will tell you how long it’ll take to recoup your refinance expenses. To calculate it, divide your closing cost amount by your monthly savings.

For example, let’s say your monthly payment drops by $241. It would take approximately 21 months for you to break even on $5,000 in closing costs. If you think you’ll sell your house and move before you break even, then refinancing might not be worth it.

HOW TO REFINANCE YOUR MORTGAGE AND SAVE BIG

How long does it take to refinance?

While a mortgage refinance usually takes 30 to 45 days to complete, the process might be longer or shorter, depending on your property, the complexity of your finances, and the current market. To make sure you don’t miss out on a good mortgage rate, you can lock in your rate for a given period, around 30 to 60 days.

When should I refinance?

In the following situations, refinancing your mortgage is probably worth the time and money:

Your credit score increases

A higher credit score tells a lender that you’re a responsible borrower and opens the doors to lower interest rates. If your score has gone up since you first took out your mortgage, you can potentially save hundreds or even thousands of dollars in interest by refinancing to a lower rate.

WHEN IS THE RIGHT TIME TO REFINANCE MY MORTGAGE?

You can get a lower interest rate

A higher interest rate will increase the overall cost of your mortgage. If you’re able to lock in a lower rate because your credit score has increased or mortgage refinance rates have gone down, you’re likely a good candidate for a mortgage refinance. With a lower interest rate, you can reduce your monthly payments and the total amount of interest you pay over the life of your loan.

Your ARM is about to reset

With an ARM, you’ll lock in a low, fixed interest rate for a given period of time. When that time frame comes to an end, the rate will reset to the prevailing interest rate, which may be higher.

It’s a good idea to refinance your adjustable-rate mortgage before it resets to a new rate, especially if you know the new rate will be significantly higher and impact your monthly budget. You might also want to refinance if you prefer the stability of a mortgage payment that doesn’t change.