When You Should or Should Not Refinance Your Mortgage

This guide covers when you should or should not refinance your mortgage. People are often on the fence as to when you should or should not refinance your mortgage. Many experts out there have “rules of thumb” to answer the question, “when you should or should not refinance your mortgage?” For instance, some say when you should or should not refinance if interest rates drop by 0.5%, or 1%, or whatever. But the decision to refinance or not actually depends on whether refinancing will help you achieve your goal. In the following paragraphs, we will cover when you should or should not refinance your home mortgage.

When You Should or Should Not Refinance Your Mortgage

Mortgage refinances cost money in up-front fees. You shouldn’t refinance the mortgage just because rates have dropped by half a point. Homeowners need to evaluate the net tangible benefit by refinancing. There are several common reasons that homeowners refinance:

Pay less interest over the life of the loan
Lower the monthly payment
Cash out some home equity

You can pay less interest by refinancing to a lower interest rate, a shorter term, or both. Refinancing can reduce your monthly cost by extending your repayment over a longer term, by lowering your interest rate, or both. And you can convert your home equity to cash with a home equity loan or cash-out refinance. It makes sense to refinance if you can accomplish your goal by doing so.

When You Should or Should Not Refinance: Understanding Breakeven Point

When You Should or Should Not Refinance Your Mortgage: If your main goal for refinancing is to lower your interest expense, you’ll want to make sure that you will break even before you sell your home. You want to make sure that you’ll recoup the cost of refinancing during the time that you expect to own your home.

For instance, if your new loan saves you $250 each month and refinancing costs $5,000, you’ll break even in 20 months. If you expect to own your home for five years (60 months), you’ll end up ahead by $10,000 by refinancing. But if your savings were only $75 per month, it would take 67 months to break even, and refinancing wouldn’t make sense.

A good refinance breakeven calculator makes it easy to determine your potential savings from refinancing.

When You Should or Should Not Refinance Your Mortgage: Refinancing to Lower Your Mortgage Rate

You could drive yourself crazy monitoring interest rates on the financial pages. They change all day long. But interest rates throughout the country don’t really determine your refinance decision. There are many reasons that you could improve your mortgage even if interest rates overall are higher.

Your credit rating might have improved recently. If your FICO score increases even by 20 points, that could qualify you for a lower mortgage rate than the one you have. Check with a lender to see where you stand.

If your finances have improved, or your mortgage is over ten years old, consider refinancing your home from a 30-year to 15-year mortgage. Interest rates for 15-year loans run .5% to 1% lower than rates for 30-year loans. So you could get a lower rate, a faster payoff, and pay less interest over the life of your loan.

When You Should or Should Not Refinance: Value of the Home

If your home value has increased and you’re currently paying private mortgage insurance (PMI) or government-backed insurance (MIP), you might be able to refinance to a loan with no mortgage insurance. Or at least cheaper mortgage insurance. Even if mortgage rates have not dropped for everyone, you could save by refinancing to a loan with no PMI or MIP.

However, there is no need to refinance your home if you’ve paid down your loan to 80% of the sales price. Instead, contact your lender to eliminate the mortgage insurance premiums you’re paying if they haven’t already canceled it. Note that this applies to conventional (non-government) loans only. The only way to cancel monthly MIP for FHA and USDA loans is to refinance to a conventional loan.

When You Should or Should Not Refinance: Refinancing To Lower Your Monthly Payment

When You Should or Should Not Refinance Your Mortgage: If you’re refinancing to reduce your payment, there are a few ways to do that. First, you can reduce your payment just by taking your remaining balance and refinancing it to a new term. Even if your interest rate was the same, your payment would be lower (try it with a mortgage calculator and see for yourself).

If you can get a new term plus a lower interest rate, you can drop your payment even more. And features like interest-only payments can give you still more breathing room. Understand that extending your term to get lower monthly payments will probably increase your cost over the life of the loan term.

When You Should or Should Not Refinance: Benefit of Getting a Stable Payment

Finally, some homeowners refinance to replace an adjustable-rate mortgage (ARM) with a fixed-rate mortgage. With fixed mortgage rates under 3% for 15-year loans and 4% for 30-year loans, it makes little sense to choose an AR today. And it makes a lot of sense to nail down a low fixed rate if you plan to keep your home and your mortgage for more than a few years.

Net Tangible Benefit of a Cash-Out

You can refinance your mortgage to take cash out of your home, whether you need to pay off other high-interest debts or fund a home renovation. Refinancing for debt consolidation should not be done lightly, especially if your debts are the result of overspending. If you don’t stop overspending, you’re likely to run up your credit cards again and find yourself in a worse financial position overall. (85% of people who consolidate debt run their credit cards back up.)

There are other questionable uses for cash out. Don’t add to your mortgage debt to buy a car or go on vacation. Financial experts recommend that you use short-term financing like auto or personal loans to buy short-term assets like cars. You don’t want to be paying for 30 years on a car you junked a decade ago.

Be very careful about borrowing money to renovate your home. However, this could be reasonable if you need to fix the roof and replace floors after a flood for instance. If you’re upgrading a property so you can age in place or expand it, contact a reputable real estate agent instead to see if you would be better off moving.

When You Should or Should Not Refinance My Mortgage?

If you’re still wondering, “When should I refinance my mortgage? ” click the link below to get a custom refinance quote from Gustan Cho Associates. Plug that interest rate and mortgage costs into a refinance breakeven calculator and find your breakeven point. As long as you own your home longer than the breakeven point, you’ll come out ahead by refinancing.

When You Should or Should Not Refinance Your Mortgage: The “No Brainer” Refinance

What if you don’t know when you’ll sell your home? In general, it makes sense to refinance with the least amount of upfront costs if you don’t know how long you’ll have your loan. And if you can pull off a no-cost refinance and still have a lower interest rate, your breakeven point is zero and you’ll always come out on top.

What’s a “no-cost” refinance? It’s a refinance in which the lender pays all of your closing costs for you, and in exchange for this, you pay a slightly higher interest rate. If that rate is still lower than your current loan’s interest rate, refinancing makes sense for you.

When You Should or Should Not Refinance: Should I Refinance My Mortgage?

Mortgage Rates are still at historic lows. Many homeowners who purchased their homes a few years ago at mortgage rates in the mid 4.0% can benefit huge savings by refinancing their mortgage loans because mortgage rates are below 4.0% depending on your credit profile as well as your loan to value. Many home buyers who purchased their homes a few years back have seen a double-digit annual appreciation of their homes where they some homeowners, especially in many areas of California and Florida, have more than 20% increase in value. For homeowners who are fortunate to have their homes appreciated over 20% in value and purchased their homes with an FHA Loan, they should consider refinancing their FHA Loans to a Conventional Loan where they can eliminate paying any mortgage insurance premium. You can purchase house also with no money down payment in California for example. Check to buy a home with no money down.

When You Should or Should Not Refinance: FHA Loan To Conventional Loan

All 30 year fixed rate FHA Loan programs require mandatory annual FHA mortgage insurance premium for the life of their 30 year FHA Loan no matter what the loan to value is. Homeowners, especially California homeowners, who purchase their homes a few years ago have seen an appreciation of their home of more than 20%. California home values are almost double than the national average and the average California mortgage loan amount is $400,000. FHA mortgage insurance premium can be very expensive and California homeowners who have at least 20% or more equity should consider refinancing their FHA Loans to a Conventional Loan and totally eliminate their FHA mortgage insurance premium.

HomePath Renovation Mortgage

Fannie Mae has discontinued the HomePath Renovation Mortgage. The HomePath Renovation Mortgage was Fannie Mae’s version of the FHA 203k Rehab Loan where home buyers of Fannie Mae owned properties could get financing of an acquisition and construction loan all in one loan program similar to the FHA Rehab Loan Program with a small down payment. Homebuyers can still purchase HomePath Properties because Fannie Mae has not discontinued the HomePath Homes. Fannie Mae still has a consistent inventory of foreclosed homes in their inventory and is listed on Fannie Mae Renovation homepath website.

This guide on When You Should or Should Not Refinance Your Mortgage was updated on December 1st, 2024.