September 21, 2021 Cody Marchant

When Should You Refinance Your Mortgage

In February 2020, the Federal Reserve dropped interest rates to historic lows. And ever since, there’s been a huge jump in mortgage refinancing. We have gotten a ton of questions from readers asking “when should you refinance?” so we decided to create an article about it. 

Refinancing is when you trade in your current mortgage for a new one in hopes of savings money or making home upgrades.

While mortgage refinancing activity has dramatically increased, it doesn’t always mean it’s the best decision. Let’s take a look when you should and shouldn’t refinance. 

How Refinancing Works 

Refinancing your mortgage is simple. Essentially, a mortgage refinance is the process of taking out a new home loan to replace your current one. However, the simplicity of how it works varies from person to person.

While there are several reasons homeowners choose to refinance, the most common is to obtain a better interest rate. By refinancing your home at a lower rate, you can save a significant amount of money. If you choose to refinance, here’s a breakdown of how the process will go:

  • Use a refinancing calculator to determine if refinancing your home loan makes sense. 
  • Research lenders and find the one that works best for your situation.
  • Apply for refinancing – have your most recent pay stubs, W-2s, and bank statements. Lock in an interest rate.
  • Go through underwriting – depending on the type of refinance you want; there are certain details the lender will need.
  • Get a home appraisal – this determines what options are available to you based on your equity.
  • Close on your new mortgage.

When You Should Refinance Your Mortgage

Many factors play into the decision to refinance, such as current interest rates, the length of time you plan to stay in the home, and the funds for upfront costs. In most situations, refinancing makes sense.  

What to consider when refinancing your mortgage: 

  • Will you get a lower interest rate? Experts say you need at least 1% lower to be worth it.
  • Can you afford to shorten the term of your loan? This means if you want to transition from a 30-year mortgage to a 15-year mortgage because it will most likely increase your monthly payments. In return, you’ll pay off your loan much faster and reduce the total interest you pay. 
  • How long do you plan to stay in the home? Is it long enough to recoup the costs of refinancing?
  • Do you currently have private mortgage insurance (PMI) on your mortgage? Refinancing can help eliminate that.

When it Doesn’t Make Sense to Refinance 

Saving money and tapping into your home’s equity sounds appealing, but there are also some drawbacks homeowners need to take into consideration. In some situations, refinancing could actually end up costing you more money and be more of a hassle than you expected.

Consider your situation and weigh these drawbacks of refinancing before moving forward.

  • The savings may not be worth it.
  • Refinancing may reduce equity in your home.
  • Your monthly payments could increase. 
  • Refinancing is a process – it takes time. 
  • There are upfront fees associated with refinancing.

When interest rates are low, refinancing makes a lot of financial sense. However, to see if it makes sense for your situation, try entering your information into our free refinancing calculator.

Keep in mind that increasing the life of your loan could result in increasing your total monthly payments, even if your interest rate goes down.

How to Calculate Your Savings

How to Calculate Your Mortgage Refinance Savings

How much you save when refinancing is based on two factors:

Cash savings – the difference between your current monthly mortgage payments and your new monthly mortgage payment.

The difference in how much you owe on your mortgage.

You also have to take into consideration the number of years you’ll be making new monthly payments before recouping the costs of refinancing.

Determining how long you’ll stay in your home plays a large factor in whether you should refinance and how much money you’ll save.

Click here to use our refinance calculator to determine if refinancing your home loan makes sense for your situation. You can also play around with different rates and closing costs to determine when a refinance will save you money! 

Is Refinancing Right for You? 

With low interest rates sweeping the nation, many homeowners are tempted to take advantage of potential savings. But how do you know if it’s the right time for you to do a mortgage refinance?

Research and studies show that refinancing is typically worth the time, effort, and upfront costs if you plan to stay in your home for at least five years. The longer you stay in your home after refinancing, the more the lower interest rate will pay off. If your current home is only temporary, than it’s not worth putting the time, effort, and money toward refinancing. 

Refinancing is also an option for those looking to combine two mortgages into one, or homeowners who want to dip into their home equity to consolidate debt or make home upgrades. These options and more are all best to discuss with your lender as they will know how to handle your unique situation.

Get a FREE no obligation refinancing quote from Guaranteed Rate through our partnership by clicking on this link.

For more information about mortgage refinancing, check out our resources page.