When is refinancing worth it?

A mortgage is a major financial commitment, but it doesn’t have to be set in stone. As life changes and financial goals shift, refinancing can help ensure your loan still works in your favor. By replacing your current mortgage with a new one, you may be able to lower your interest rate, adjust your loan term or access home equity.

How can you tell if refinancing may be a smart move for you?

How does refinancing work?

Refinancing is similar to applying for a new mortgage. Lenders evaluate your creditworthiness, an appraisal determines your home value, and you’re responsible for any fees and closing costs.

If approved, your new loan will pay off the existing mortgage, ideally leaving you with better terms.

When does refinancing make sense?

Refinancing is considered a good idea if it improves your existing loan terms and/or provides new financial benefits that your previous mortgage did not. For example:

• Reducing your interest rate by even 1% can mean significant long-term savings.
• Replacing a 15-year mortgage with a 30-year refi may increase your interest costs, but can also reduce your monthly payments significantly.
• Tapping into home equity with a cash-out refi can help pay for home improvements, fund education or consolidate high-interest debt.

Perhaps the best indicator that refinancing is worthwhile is when the savings from the new loan outweigh the upfront costs. A break-even analysis can help you determine how long it will take to recover upfront costs and start saving. To calculate, divide the total refi costs by your expected monthly savings.

For example, $6,000 in closing costs divided by $100 in monthly savings equals 60 months of payments to break even. If you’re not planning to stay in the home for at least five years, refinancing may not end up saving you money.

The best way to make an informed decision is to consult with a mortgage professional. Have any questions? Reach out today.