Refinancing your mortgage means replacing your current home loan with a new one, usually with different terms. Homeowners refinance for many reasons: to lower their interest rate, reduce their monthly payment, shorten their loan term or tap into home equity. Done at the right time, refinancing can save a meaningful amount of money. Done at the wrong time, it can cost more than it saves.
The most common reason to refinance is to secure a lower interest rate. Even a modest reduction can lower your monthly payment and the total interest you pay over the life of the loan. Refinancing can also help you switch from an adjustable-rate mortgage to a fixed rate if you'd prefer a predictable payment.
Other reasons to consider refinancing
Some homeowners refinance into a shorter term to pay off their home sooner and save on interest, accepting a higher monthly payment in exchange. Others use a cash-out refinance to access home equity for renovations or to consolidate higher-interest debt. Each option has trade-offs, so it's important to be clear about your goal before you begin.
Refinancing isn't free. Closing costs, appraisal fees and other charges can add up. A helpful way to evaluate a refinance is to calculate your break-even point — how long it will take for your monthly savings to cover the upfront costs. If you plan to move before reaching that point, refinancing may not make sense.
Refinancing may also be less attractive if you're far into your current loan. Restarting a long term can lower your payment but increase the total interest you pay. Your credit, income and the amount of equity in your home will also affect the rates and terms you're offered.
Before deciding, gather quotes from more than one lender and compare the full cost of each option, not just the interest rate. Look at the annual percentage rate, the closing costs and how the new loan fits with your long-term plans for the home.
Make a decision with clear numbers
Refinancing is a big financial decision, but it doesn't have to be confusing. With a clear picture of your goals, your break-even point and your options, you can decide whether now is the right time.
The mortgage advisors at Finance Wisdom Center can run the numbers with you and compare refinance options side by side. Book a free refinance review today.
