Should You Refinance Your Mortgage?
Refinancing replaces your existing mortgage with a new one, typically at a lower interest rate. The goal is to reduce your monthly payment, shorten your loan term, or both. However, refinancing comes with closing costs that must be weighed against the savings.
The breakeven point is the number of months it takes for your monthly savings to recoup the closing costs. If you plan to stay in your home longer than the breakeven period, refinancing generally makes financial sense. Typical closing costs range from 2% to 5% of the loan amount.
Consider refinancing when interest rates drop at least 0.5% to 1% below your current rate, your credit score has improved significantly, or you want to switch from an ARM to a fixed-rate mortgage. Also consider your remaining loan term -- refinancing into a new 30-year loan resets your amortization clock.
When comparing offers, look at the APR (Annual Percentage Rate) rather than just the interest rate. The APR includes fees and closing costs, giving you a more complete picture of the true cost of the loan.
Frequently Asked Questions
When does refinancing make sense?
Refinancing typically makes sense when you can lower your rate by at least 0.5% to 1%, you plan to stay in the home past the breakeven point, or you want to switch loan types (e.g., ARM to fixed). Use the breakeven calculation to determine if the closing costs are worth the monthly savings.
What are typical refinance closing costs?
Refinance closing costs typically range from 2% to 5% of the loan amount, or roughly $3,000 to $15,000 on a $300,000 loan. Costs include application fees, appraisal, title insurance, origination fees, and recording fees. Some lenders offer no-closing-cost refinancing with a slightly higher rate.
What is the breakeven point on a refinance?
The breakeven point is the number of months it takes for your monthly savings to equal the closing costs. For example, if closing costs are $5,000 and you save $200/month, the breakeven point is 25 months. If you stay past that point, the refinance saves you money.
Should I refinance to a shorter term?
Refinancing to a shorter term (e.g., 30 to 15 years) increases your monthly payment but dramatically reduces total interest paid. If you can comfortably afford the higher payment, a shorter term builds equity faster and saves tens of thousands in interest.
Does refinancing affect my credit score?
Refinancing may temporarily lower your credit score due to the hard inquiry and new account. However, the impact is usually small (5-10 points) and recovers within a few months. Making on-time payments on the new mortgage will help rebuild your score.