Under the right circumstances, refinancing a home loan could be a great way to save money in the long term, or to give you flexibility to make other big purchases. But with ever-changing market conditions, how do you decide whether now’s the right time for you to consider a refinance? 

With mortgage interest rates having hit record lows just a few years ago, many lucky homeowners locked in historically low rates. But if you bought at a time when rates were higher and are considering the possibility of refinancing to improve your financial situation, what do you need to know? Interest rates are always fluctuating, and you may be wondering how low rates need to go for it to make financial sense for you to take advantage of the potential benefits of refinancing.

What is refinancing a home loan?

Simply put, refinancing is the process of replacing your existing mortgage with a new mortgage that has more favorable terms. It puts you, the homeowner, in a better financial situation. There are many reasons why you may want to refinance, but generally, the decision to move forward with a new mortgage comes down to:

1. Saving money: By refinancing when interest rates are lower – even by a percentage point – you could reduce your monthly payments and cut interest rate costs by thousands over the life of your loan. But reacting to a lower rate may not always be the right move for your situation. Reach out to your mortgage loan officer to see if refinancing when the rates are lower make sense for you.
2. Paying off your loan quicker: Maybe you were set up with a longer term when you first purchased your home. Now, a few years later, your financial situation has changed, and you can afford to make higher mortgage payments. By refinancing to a shorter term, you could pay off the loan quicker, decreasing the amount of interest you’re charged over time.
3. Pulling cash out: Beyond saving money, refinancing allows you to tap into equity you’ve built to fund other areas of your life. (Think your child’s college tuition or wedding, home improvements, a dream vacation or wiping out credit card debt.) For example, let’s say you owe $180,000 on your $300,000 home, and you refinance with a $220,000 mortgage. Doing so leaves you with $40,000 to cash out and use however you’d like.

Determining whether it’s worth it: How find your breakeven point

Interest rates are a big part of the picture when figuring out whether it’s worth it right now for you to refinance your mortgage, but it’s just one factor that goes into the decision.

Generally speaking, it’s more important to understand your breakeven point – the point at which any savings from financing offsets the costs associated with obtaining a new loan.  Knowing your breakeven point is a key driver in knowing whether refinancing right now is going to be worth it.

Here’s how to calculate your breakeven point:

First, you’ll want to tally up all the costs that would be associated with refinancing your mortgage. This includes expenses like application fees, appraisal fees, origination fees, and any other closing costs. If you don’t know what your costs would be, consult with a Mortgage Loan Officer who can give you a clearer picture of what to expect.

Next, estimate how much you’ll save each month by refinancing. This can be calculated by comparing your current monthly mortgage payment to your new payment after refinancing. Take into account any changes in interest rate, loan term, or loan type. For example: Are you switching from an adjustable-rate mortgage to a fixed-rate mortgage?

Once you’ve determined the total cost of refinancing and your monthly savings, you can calculate your breakeven point. Divide the total refinancing costs by the monthly savings to determine how many months it’ll take to recoup the upfront expenses. For example, if your refinancing costs are $5,000 and your monthly savings are $100, your breakeven point would be 50 months. ($5,000 divided by $100 = 50).

Now’s where you’ll consider your future plans. How long do you plan to stay in your home? If you anticipate selling or refinancing again within a few years, you may not have enough time to recoup the costs involved with refinancing. But if you plan to stay in your home for longer than that breakeven point, refinance can result in significant savings over time.

Your Mortgage Loan Officer can be your biggest ally to help guide you along the way as you’re working through deciding whether refinancing is right for you. They’ll be there to answer any questions you might have, and can walk you through the steps involved with refinancing your mortgage.

Want to learn more about refinancing your mortgage? We’re ready to help.

Last updated June 17, 2024