Refinance Your Home

When you refinance your home, you’re replacing your existing mortgage with a new one that, ideally, has a lower interest rate, better terms, or both. While this can lower your mortgage payment, you should only refinance when it makes sense. For example, it might be a good time to refinance if interest rates have dropped or your credit score has improved.

5 Reasons to Refinance

Refinancing your home can be a smart financial move, making it easier to manage your mortgage or saving you money. Here are some key reasons to consider refinancing:

1. Falling interest rates: When mortgage rates drop, you can take advantage of lower rates to reduce monthly payments and overall loan costs.
2. Replacing an adjustable-rate mortgage (ARM): If you expect ARM rates to rise soon, locking into a fixed-rate mortgage can provide a stable interest rate and predictable  monthly payment.
3. Your credit has improved: A higher credit score can help you qualify for a lower interest rate, better terms, and lower monthly payment compared to your current mortgage.
4. Lengthening the loan term: Extending the loan term can reduce monthly payments, making your mortgage more affordable. However, this may increase the total interest paid over time.
5. Taking cash out of your home: You can access home equity with a cash-out refinance and use those funds for major expenses like home improvements or debt consolidation.

Getting the Best Deal on a Refinance

In order to get the best possible deal when refinancing, start by checking your credit score so you know where you stand. If your credit score has improved since you locked in the rate on your current mortgage, you may qualify for better interest rates.

Shop around with a variety of providers, including banks, credit unions, and mortgage brokers. Also be sure to compare good faith estimates from a variety of lenders, considering the interest rate, closing costs, and fees.

Closing costs can reach up to 5% of the loan’s value. Common fees include:

To protect your credit score and mortgage rate prospects, keep your loan shopping within a short time frame. Mortgage inquiries made within a 30–45 day window are treated as a single inquiry.

Is a Mortgage Broker Worth It for a Refinance?

Working with a mortgage broker to refinance your home can be beneficial. Brokers can access multiple lenders on your behalf, in addition to handling paperwork and communication, saving you a significant amount of time. Brokers are typically compensated by loan originators, so you usually don’t have to pay for their services directly.

There are, however, some potential downsides of working with a mortgage broker. For example, a broker may be incentivized to recommend loans from lenders that offer them higher commissions. These loans may not align with your best interests. Additionally, not all lenders work with brokers, so you may miss out on certain options if you don’t also shop around on your own time.

When Should You Lock Your Rate?

Mortgage rates can change often. Once you have an offer you like, lock in your rate 30–60 days before closing to protect against increases.

Only get a mortgage rate lock for as long as you need for closing. Lenders may charge a higher rate or additional fees for a longer lock period.

Are Points Worth the Costs?

You can secure a lower interest rate by paying “points,” or prepaying interest, equal to 1% of your loan value. Buying points can be beneficial if you remain in your home long enough. Points may also be tax-deductible, should you itemize rather than take the standard deduction. 

However, buying points comes with higher upfront costs, which may not be ideal if your funds are limited. It’s generally best to buy points only if you plan to stay in the home at least long enough to break even.

How to Find Your Breakeven Point

The breakeven point of a refinance is the amount of time it takes for your savings to equal your costs. If you sell your home before the breakeven point, you may lose money.

To determine your breakeven point, start by adding up the total fees and closing costs of a refinance. Next, calculate your monthly savings by subtracting the new mortgage payment from your current one, including private mortgage insurance (PMI) savings and potential tax benefits. Divide the total refinancing costs by the monthly savings to get the number of months it will take to breakeven with a refinance.

The Bottom Line

Refinancing your home can be an effective way to save money or access home equity, but it’s typically only a good idea when the savings outweigh the costs. If you shop around for the best terms and stay in your home long enough, refinancing can be worth it. However, if closing costs are too high or you can only get a minimal rate reduction, keeping your current mortgage may be the better option.