Is Refinancing My Mortgage a Good Idea? (2024)

Whether refinancing your home is a good idea depends on many factors, including current interest rates, the length of time you plan to live there, and how long it will take to recoup your closing costs. In some cases, refinancing is a wise decision. In others, it may not be worth it.

Refinancing is generally easier than securing a loan as a first-time buyer because you already own the property. If you have owned your property or house for a long time and built up significant equity, refinancing will be even easier. However, refinancing can lead to a longer loan or more interest, depending on on the terms of your new loan and current interest rates.

Key Takeaways

  • Refinance to a loan with a lower interest rate can save you money in the long-term.
  • Refinancing typically entails costs, such as closing costs.
  • Consider staying in the home long enough to recoup the costs of refinancing.
  • Getting rid of the cost of private mortgage insurance (PMI) is one good reason to refinance.

Reasons to Refinance

So when is refinancing your mortgage a good idea? One rule of thumb is that refinancing may be a good idea when you can reduce your current interest rate by 1% or more. That's because you can save money in the long-term. Refinancing to a lower interest rate also allows you to build equity in your home more quickly.

If interest rates have dropped or if you can qualify for a lower rate, you can potentially also refinance to shorten the loan term without changing the monthly payment. For example, you may want to refinance from a 30-year to a 15-year fixed-rate mortgage.

Similarly, lower interest rates could be a reason to convert from a fixed-rate to an adjustable-rate mortgage (ARM), as periodic adjustments on an ARM should mean lower rates and smaller monthly payments.

During times when mortgage rates are rising, this strategy makes less financial sense. Indeed, the periodic ARM adjustments that increase the interest rate on your mortgage may make refinancing to a fixed-rate loan a good choice.

Mortgage lending discrimination is illegal. If you think you've faced faced discrimination based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

Consider Closing Costs

Closing costs from refinancing affect the savings you could get, so you'll need to calculate whether getting a new loan would cost you more than it would save you.

You will need to cover charges for title insurance, attorney’s fees, an appraisal, taxes, and transfer fees, among others. These refinancing costs, which can be between 3% and 6% of the loan’s principal, are almost as high as the cost of an initial mortgage and can take years to recoup.

If you are trying to reduce your monthly payments, beware of “no-closing-cost” refinancings from lenders. Although there may be no closing costs, a bank likely will recoup those fees by giving you a higher interest rate, which would defeat your goal.

Consider How Long You Plan to Stay in Your Home

In deciding whether or not to refinance, you’ll want to calculate what your monthly savings will be when the refinance is complete. Let’s say, for example, that you have a 30-year mortgage loan for $200,000. When you first assumed the loan, your interest rate was fixed at 6.5%, and your monthly payment was $1,257. If interest rates fall to 5.5% fixed, this could reduce your monthly payment to $1,130—a savings of $127 per month, or $1,524 annually.

Your lender can calculate your total closing costs for the refinance should you decide to proceed. If your costs amount to approximately $2,300, you can divide that figure by your savings to determine your break-even point—in this case, the home for two years or longer, refinancing would make sense one-and-a-half years in the home [$2,300 ÷ $1,524 = 1.5]. If you plan to stay in the home for two years or longer, refinancing would make sense.

If you want to refinance with less than a 1% reduction, say 0.5%, the picture changes. Using the same example, your monthly payment would be reduced to $1,194, a savings of $63 per month, or $756 annually [$2,300 ÷ $756 = 3.0], so you would have to stay in the home for three years. If your closing costs were higher, say $4,000, that period would jump to nearly five-and-a-half years.

If the equity in your home is less than 20%, you could be required to pay PMI, which could reduce any savings you might get from refinancing.

Consider Private Mortgage Insurance (PMI)

During periods when home values decline, many homes are appraised for much less than they had been appraised in the past. If this is the case when you are considering refinancing, the lower valuation of your home may mean that you now lack sufficient equity to satisfy a 20% down payment on the new mortgage.

To refinance, you will be required to provide a larger cash deposit than you had expected, or you may need to carry PMI, which will ultimately increase your monthly payment. It could mean that, even with a drop in interest rates, your real savings might not amount to much.

Conversely, a refinance that will remove your PMI would save you money and might be worth doing for that reason alone. If your house has 20% or more equity, you will not need to pay PMI unless you have anFHA mortgage loanor you are considered a high-risk borrower.

How Long Do You Have to Pay PMI?

You will have to pay private mortgage insurance (PMI) until you have paid at least 20% equity in your home. This is also when you will have a loan-to-value ratio, or the ratio of the amount of your loan compared to the value of your home, of 80%.

What Is the USDA Annual Guarantee Fee?

USDA mortgages don't have traditional private mortgage insurance (PMI), but they do have an annual guarantee fee. This is a cost is paid by the lender and passed on to the borrower. To remove a guarantee fee, you will have to refinance to a different type of loan.

Can You Refinance with a HELOC?

When you have a home equity line of credit (HELOC) on your home, your ability to refinance your primary loan can be affected. Your HELOC lender may need to approve of the new primary loan.

The Bottom Line

Whether it's a good idea to refinance your mortgage will often depend on whether you can get a lower interest rate to save money. But many other factors play a role in whether refinancing will be in your best interest, including whether you can get lower monthly payment amounts and whether you can qualify for a new mortgage. Consider consulting a financial advisor to guide you through your options.

Is Refinancing My Mortgage a Good Idea? (2024)

FAQs

Is Refinancing My Mortgage a Good Idea? ›

One rule of thumb is that refinancing may be a good idea when you can reduce your current interest rate by 1% or more. That's because you can save money in the long-term. Refinancing to a lower interest rate also allows you to build equity in your home more quickly.

Is refinancing a mortgage a good idea? ›

It might be a good idea to refinance your home loan if you are interested in potentially saving some money, have a higher credit score and are able to obtain a lower interest rate. This financial decision should be made with careful consideration.

Which is not a good reason to refinance your mortgage? ›

Refinancing to lower your monthly payment is great unless you're spending more money in the long-run. Moving to an adjustable-rate mortgage may not make sense if interest rates are already low by historical standards. It doesn't make sense to refinance if you can't afford the closing costs.

What is the negative side of refinancing? ›

The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.

Does it make sense to refinance for 1%? ›

How Much Difference Does 1% Make On A Mortgage Rate? The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

Does refinancing your mortgage hurt credit? ›

Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.

Do you get money back when you refinance your mortgage? ›

With a cash-out refinance, you get a new home loan for more than you currently owe on your house. The difference between that new mortgage amount and the balance on your previous mortgage goes to you at closing in cash, which you can spend on home improvements, debt consolidation or other financial needs.

What do you lose when you refinance? ›

You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

What disqualifies a refinance? ›

In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.

When not to refinance a house? ›

Your Credit Score Isn't in Great Shape

Refinancing can make sense if your credit has improved since you took out your current home loan. But if your credit score hasn't changed or it's gone down, you may not be able to access the benefits that refinancing can provide.

Will I owe more if I refinance? ›

In most scenarios, a refinance will affect your monthly mortgage payment. But whether the amount goes up or down depends on your personal financial goals and the type of refinance you choose.

Does refinancing hurt your home equity? ›

Though your equity position over time will vary with home prices in your market along with the loan balance on your mortgage or mortgages, refinancing in itself won't affect your equity.

Who benefits from refinancing? ›

Some borrowers are able to reduce the term of their loan by refinancing. If you are a borrower who has had your loan for a number of years, a reduction in interest rates can allow you to move from a 30-year loan to a 20-year loan without a significant change in monthly mortgage payments.

What will mortgage rates be in 2024? ›

April forecasts from both Fannie Mae and the Mortgage Bankers Association predict the average 30-year rate will be at 6.4% by the end of 2024.

At what point is it worth refinancing? ›

Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Using a mortgage calculator is a good resource to budget some of the costs.

Will mortgage rates ever be 3 again? ›

It's possible that rates will one day go back down to 3%, though if current trends hold that's not likely to happen anytime soon.

When should you refinance a mortgage? ›

A rule of thumb says that you'll benefit from refinancing if the new rate is at least 1% lower than the rate you have. More to the point, consider whether the monthly savings is enough to make a positive change in your life, or whether the overall savings over the life of the loan will benefit you substantially.

When you refinance, do you start over? ›

Because refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan's term or the remaining repayment period.

What happens when you refinance your mortgage? ›

Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.

Why do mortgage companies want you to refinance? ›

Your servicer wants to refinance your mortgage for two reasons: 1) to make money; and 2) to avoid you leaving their servicing portfolio for another lender. Some servicers will offer lower interest rates to entice their existing customers to refinance with them, just as you might expect.

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