First, Ask Whether Refinancing Will Give You a Clear Benefit
Refinancing means taking out a new mortgage that takes the place of your current home loan. But getting a new loan doesn't automatically mean getting a better deal. For refinancing to be worth it, the new mortgage should give you a clear benefit, whether financial or practical.
That benefit can take different forms. For example, you might be able to lower your interest rate, reduce your monthly payment, change your loan term, switch to a different rate structure, or access some of your home equity.
However, refinancing also comes with costs. That's why the decision should be based on more than current mortgage rates. You need to compare your existing loan with the new one and consider what you want to achieve.
Before applying, ask yourself a simple question: What will refinancing improve for me?
Refinance When You Can Secure a Lower Rate
A reduced mortgage rate is one of the major reasons homeowners consider refinancing.
If current mortgage rates are lower than the rate on your existing mortgage, refinancing may reduce your monthly principal and interest payment. Depending on your loan balance and remaining term, it could also reduce the amount of interest you pay over time.
But don't focus on the rate alone. A lower rate doesn't necessarily make refinancing worthwhile if the difference is small and the cost of getting the new mortgage is high.
Your available rate will be based on your circumstances. Credit, income, debt, home equity, loan program, and other factors can affect the terms available to you.
If credit is one of your concerns, you can read our guide on refinancing a mortgage with bad credit.
Consider Refinancing to Lower Your Monthly Payment
Want to reduce your monthly mortgage payment? Here, refinancing may be worth considering. A lower interest rate may help you achieve this. You may also be able to reduce your monthly payment by refinancing your remaining mortgage balance over a longer loan term.
A lower payment can give you more room in your monthly budget. However, you should also consider the total cost of the new mortgage. If you choose a longer loan term, you may end up paying more interest over time.
We recommend you compare both the short-term benefit and long-term cost before making your decision.
Pick a Fixed Rate for More Predictable Payments
If you have an adjustable-rate mortgage or ARM, refinancing into a fixed-rate mortgage may give you more predictability.
With a fixed-rate mortgage, the rate doesn't change during the whole loan term. In contrast, the rate on an ARM can change after the initial fixed period.
Moving to a fixed rate may therefore be worth considering if you prefer a more predictable principal and interest payment or are concerned about future rate adjustments.
But don’t forget to compare the new rate and refinancing costs with the terms of your existing ARM before making this switch.
Access Your Home Equity When It Supports a Clear Goal
Refinancing may also make sense when you want to access some of the equity you've built in your property.
With a cash-out refinance, you’ll replace your mortgage with a larger one and receive part of the difference in cash. Homeowners may consider this option for debt consolidation, home renovations, or other financial needs.
For example, if you're planning major improvements, you can learn more about using a refinance and other options in our home renovation financing guide.
Remember that you're borrowing against your home and increasing your mortgage balance. Make sure the reason for accessing your equity justifies the long-term cost of the new loan.
Calculate Your Break-Even Point
You should understand that refinancing isn't free. A new mortgage can involve appraisal, title, origination, underwriting, recording, and other closing costs.
This makes your break-even point an important part of the decision. In simple terms, it helps you estimate how long it will take to make up for your refinancing costs through monthly savings.
Suppose refinancing costs you $6,000 and lowers your monthly mortgage payment by $250. So it would take approximately 24 months of savings to recover that $6,000.
If you expect to stay in your home well beyond your break-even point, refinancing may be more attractive. If you expect to sell or move before reaching it, the savings may not be enough to justify the cost.
Don't Refinance Just Because You Can
Qualifying for a refinance doesn't necessarily mean you should move forward with one. Refinancing should improve your financial situation or help you accomplish a specific goal.
Check the terms of your current home mortgage first. If you already have a favorable interest rate, are relatively far into your loan term, or plan to sell your home soon, replacing the mortgage may not provide enough benefit.
Your current loan can also affect whether now is a good time to refinance. Some mortgage programs have specific refinancing requirements or waiting periods. On our website, you can find a guide explaining how long you may need to wait before refinancing a mortgage.
Explore Your Refinance Options With LBC Mortgage
Still not sure whether refinancing is worth it for you? This is where support from a mortgage professional can help. At LBC Mortgage, we'll help you compare your existing mortgage with refinance options that may be available for you based on your financial situation.
Our specialists will review your goals, credit profile, income, home equity, current loan terms, and expected refinancing costs. We'll also help you understand how a new interest rate, monthly payment, loan term, and closing costs may affect you in both the short and long term.