Is Refinancing My Mortgage a Good Idea?

Historically low rates caused demand for mortgage refinancing to jump in comparison to last year. The surge in demand among your neighbors may have you asking, “Is refinancing my mortgage a good idea?” Before you can answer that question, first consider several factors.

What would your new interest rate be?

The typical rule of thumb is if you can reduce your current interest rate by 1% or more, refinancing could make sense because of the money you can save. Equity can also be built more quickly with a lower interest rate and a shortened loan term.

Falling interest rates present the opportunity to switch from a fixed-rate to an adjustable-rate mortgage (ARM). An ARM offers a low introductory interest rate that “resets” after a predetermined period. Periodic adjustments on an ARM in a falling rate environment should mean lower rates and smaller monthly payments to solve short-term cash flow issues.

However, rising interest rates would present an opportunity to switch from an ARM to a fixed-rate mortgage. If interest rates have gone up when your ARM “resets,” monthly payments can increase and you may be in for a shock. Switching to a fixed-rate mortgage may not lower your current payments, but it could stop your payments from growing.

How much will you pay in closing costs?
In any refinancing situation, there will be closing costs that will need to be covered including but not limited to charges for an appraisal, transfer fees, attorney’s fees, title insurance, and taxes. These costs can take years to recover, so you should work the numbers to know how long it could take, which leads to another question.

How long do you plan to stay in your home?
The longer you plan to stay in place, the more it makes sense to refinance and eat those one-time fees. Your decision to refinance or not to refinance can be simplified by calculating what your monthly savings will be all things considered. Determine what your monthly payments are currently and what they would be after refinancing. Calculate your total closing costs for the refinance, which your lender can help you with. Then, divide your closing costs by your annual cost savings. This break-even point will tell you how long to plan to stay in the house.

Blog refinance equation

If you plan to stay for a longer period of time, refinancing would make sense because you would have ample time to pay off the costs. If you plan to stay in your home for a shorter time, refinancing would not make sense financially.

Use our mortgage calculators to answer other frequently asked refinancing questions and connect with our Mortgage Officer to find out more.

All applicants are subject to a credit check, debt to income verification and the property value must meet the bank’s loan to value guidelines. NMLS Co. ID #786171. Equal Housing Lender.

Check Out Our Previous Posts


Go To Top
back to top