SHOULD I REFINANCE MY MORTGAGE?

Have you been wondering, “should I refinance my mortgage?” If so, you’re in good company. We are already refinancing our mortgage on our fixer upper dream home, even though we’ve only been in it for a few months. (Click here for FAQ about our fixer upper dream home). Some of the main reasons people decide to refinance their mortgages are: (1) to get a lower interest rate, (2) to change from a variable rate to a fixed interest rate, (3) to change their monthly payment, and (4) to get rid of private mortgage insurance.

What is mortgage refinancing:

Mortgage refinancing refers to the process of getting a new mortgage to pay off the balance of your old mortgage. All you do is contact a financial institution that issues mortgages, they will do some due diligence (such as finding out your income, assets, and information about your mortgage– very much like when you took on your original mortgage) and they will pay off the balance of your old mortgage with your new mortgage. You’ll simply make payments on your new mortgage. 

Mortgage rates are still at historic lows. With the unexpected Democratic control of the Senate, mortgage rates are expected to increase. This is likely the last we’ll see of these low rates for a while. 

Should I refinance my mortgage? 

If you want to save money on interest on your mortgage, have a variable interest rate, would like to increase or lower your monthly payment, or long to get rid of pesky mortgage insurance, refinancing your mortgage may be the right choice. 

The “should I refinance my mortgage rule of thumb” is that if you’ll have a short break even period after closing costs (yes, you’ll have to pay closing costs when you refinance your mortgage), you’ll get a lower interest rate, or if you need to lower your monthly payment, then refinancing your mortgage is likely a good idea. That said, you should also look out for reasons you may want to avoid refinancing your mortgage. 

Reasons to NOT refinance your mortgage:

While there are certainly good reasons to refinance your mortgage, there are also good reasons to not do so. Some reasons to not refinance your mortgage include:

If there is a long period to recoup closing costs. 

Refinancing your mortgage might not make sense if there is a long period to recoup your closing costs. If it takes a long time to to break even and start saving money on the cost of your mortgage, it’s probably not worth it financially. This is also known as your “break even period.” A couple of factors that will influence your break even period are 1) how long you plan to stay in the property, 2) the closing costs on the new loan, and 3) your interest rate on the new loan so you can figure out how much money you’ll save. 

Closing costs divided by monthly savings = break even period. 

So let’s say you are lowering your interest rate with your new mortgage and you figure out that this will be saving you $100 per month. Your closing costs are $6000. so $6000/100 = 60. It will take you 60 months to break even with the new mortgage. 

If your closing costs are too expensive and it will take you a long time to recoup your costs, you probably want to hold off on refinancing or shop around with lenders for a better option. 

If refinancing won’t lower your interest rate. 

Another reason to avoid refinancing your mortgage would be if it doesn’t actually lower your interest rate and save you money. Some people get into trouble with this when they find variable rates that tout very low interest, but then are surprised several months (or even years) into their mortgage when their rates start increasing. 

If refinancing won’t lower your monthly payment. 

If you are seeking to refinance your mortgage because you need to lower your monthly payment, and you find that refinancing won’t actually lower your monthly payment, then refinancing is not a good idea. The problem is, with many lenders, you have to jump through a lot of hoops and fill out a lengthy application, including a credit check, to simply find out what your monthly payment would be. You can use our affiliate link here to compare multiple lenders with no impact to your credit score to find out whether refinancing would actually lower your rate

[Related: How Does Mortgage Deferment Work?]

If there are overly expensive origination fees. 

Another thing to watch out for when trying to decide whether you should refinance your mortgage is whether there will be expensive origination fees. Origination fees will most likely be included in your closing costs and they can vary greatly from lender to lender. If origination fees make or an expensive bottom line (i.e. if it will take too long to recoup your costs) you probably shouldn’t refinance your mortgage. 

Beware of “no closing cost” refinanced mortgages. 

When a financial institution offers a refinanced mortgage with “no closing costs” — it’s a bit of a misnomer. It’s not that you aren’t paying closing costs at all, but rather, those costs are rolled into your mortgage so you aren’t having to pay those costs upfront. It still might be a good deal and make sense to refinance, but don’t assume that you are getting out of closing costs or that the bank is going to front those costs for you. As long as you are still getting a good bottom line (i.e. saving money on the balance of your mortgage) it’s ok– but it’s definitely something to be aware of and to factor into your decision. 

If you are considering refinancing your mortgage, you can compare interest rates and monthly payments from multiple lenders with no impact to your credit score by using our affiliate link here

Refinancing your mortgage can be confusing. If it saves you money in the long run or helps lower your monthly payment, it’s likely the right decision. If not, it’s better to wait! 

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