September 23, 2021 Cody Marchant

Why Refinancing with a Lower Interest Rate May Not Save You Money

When you dig into the details of refinancing, you learn that there are several ways to save money on your mortgage and monthly payments.

What you may not realize, is that even when you refinance for a lower interest rate, you may not save money in the long run.

How can you tell if you’ll save money by refinancing? You can start by using our free refinancing calculator. To learn how it all works, keep reading this article.

What is a Mortgage Refinance?

Mortgage refinancing is when you trade in your current mortgage for a new one. There are generally two main options: rate term refinancing and cash out financing.

Homeowners often consider refinancing to receive a shorter loan term and/or a lower interest rate. However, there are several other reasons borrowers inquire about refinancing.

For example, if homeowners are struggling to pay off other loans (such as a car or credit card debt) or want to complete a remodel in their home, refinancing may be a good option. In these cash out refinance instances, the total amount of the loan will increase, as will the period for interest rates.

The timeline for most mortgage refinances is between 30 and 45 days. And while the process is fairly simple, there are certain requirements you must meet and steps you must take.

Use a refinancing calculator to determine if refinancing your home loan makes sense. 

Reasons to refinance your mortgage

Reasons to Refinance Your Mortgage

Here are a few reasons people refinance their mortgage. 

  • Lower interest rate
  • Shorter loan term
  • Debt consolidation
  • Mortgage consolidation
  • Eliminate mortgage protection insurance
  • Complete a home remodel 

Those are just a few of the reasons to refinance your mortgage. Regardless of your reasoning for wanting to refinance, the decision should be considered carefully. Although the benefits are plentiful, mortgage refinancing is a process and requires upfront fees such as home appraisal and closing costs.

Why Refinancing with a Lower Interest Rate May Not Save You Money

Refinancing is smart – but only when your new loan will benefit you in the long run. 

For instance, if you can lower your monthly mortgage payment by $200 to help your financial situation, then a new loan may make sense. However, if you’re trying to reduce your overall mortgage expense, and refinancing adds to that cost, you may want to reconsider.

Even with a lower interest rate, your new refinance loan could add to your overall mortgage expense. This often happens if homeowners add to their term. For example, starting over with a new 30-year loan.

Let’s say you first purchased your home for $300,000 at a 4% interest rate on a 30-year term. Fast forward five years, you now have a 25-year term. If you want to refinance for a lower monthly payment, you’ll likely have to apply for a new 30-year loan. This adds 5 more years to your term – making you pay five additional years in interest.

You’ll always pay more interest on longer-term loans. For example, a 30-year, $300,000 loan at a 3% interest rate will cost you roughly $155,000 in total interest. On a 15-year loan with the same rate, the interest payment would be roughly $73,000 — a huge difference of $80,000 or more.

When refinancing you don’t have to jump the gun. Track mortgage rates and wait for a good opportunity to save you money. 

For more accurate information based on your situation, put your information into our refinancing calculator.

How to Calculate Your Savings

How to Calculate Your Savings When Refinancing

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

  • Cash savings
  • 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.

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

When Should You Refinance Your Home? 

How do you know when you should refinance your home? When is it worth it for you to refinance?

These are frequently asked questions among homeowners, and luckily, there are a few signs to point you in the right direction.

It’s typically best to refinance when you’re not too deep into your existing loan, you expect to stay in your home for years to come, you want/need to tap into your home equity, or you can qualify for a lower rate, and you know it will be financially beneficial.

A refinancing, even if it lowers your rate, may not be worthwhile with the costs involved if you plan to move in the next couple of years. The same applies for tapping into equity for home renovations. When you use that money to increase the value of your home, then you’ll reap the financial benefits when you do decide to sell. 

Get a free no obligation refinancing quote by clicking this link