Worth of Refinancing Your Home Mortgage
What is the Best Home Mortgage Refinance Scenario?
How do you decide if refinancing a home is worth it? There are several factors to consider including your current financial situation and goals. Let’s look at a couple of scenarios.
1% Point Rule of Thumb
This rule says that if you can secure a loan with an interest rate 1 percentage point lower than your current interest rate, then you should refinance your mortgage. This scenario makes sense only if the cost of closing on the new loan does not push your monthly payment higher than your current payment. Also, factor in the length of your new loan and the break-even point when you will pay off the new closing costs.
Break-even Point Rule
The break-even point is the length of time it will take you to pay off the closing costs on your new loan. If you do not plan to remain in your home long enough to reach that break-even point, then refinancing may not be a good decision.
Change Loan Terms
If you have a balloon, jumbo or accelerated loan that is impacted by rising interest rates, you may want to refinance to change the type of loan, especially if your financial status cannot support an increased monthly payment.
Refinancing a home is a personal decision and should be based on your current financial situation and long-term goals. But if you are looking to save some money and have made at least six payments on your loan, then a refinance might be a wise decision. Investing in a home warranty can also help to save money on unexpected home repairs.
Key Benefits to Refinancing Your Mortgage
- If the difference in your current interest rate and a potential new interest rate is 1 percentage point or more, it might be a good idea to refinance and get a lower rate.
- If you have a balloon rate or adjustable-rate mortgage and can qualify for a fixed-rate loan, you might refinance the loan.
- If you have amassed a lot of high-interest debt on credit cards or other loans, securing a cash-out refinance could be a smart move to reduce your overall debt.
- If you have an unexpected expense or would like to tackle a home renovation, refinancing the mortgage to access cash from the equity could save money in the long run.
- When the closing costs - which are rolled into the new mortgage – cause your monthly payment to be too high, then refinancing might not be a good decision.
- If you plan to stay in your home for only a short time, but the break-even point on the new mortgage is longer, then you might reconsider a refinance.
- You are over halfway through your current mortgage; refinancing would reset the clock back and might be a good decision.
What are the Risks of Refinancing a Home Loan?
When considering a refinance, you also need to factor in the risks. Taking a close look at these details will help you decide whether it’s worth refinancing your home.
Refinancing costs money
Typically, refinancing costs between 2% and 5% of the total loan amount. While you can roll these costs into your monthly mortgage payment, the increased cost might increase your monthly payment and erase any savings.
Refinancing could cost more
Refinancing your home could cost you more in the long run, especially if you are near the end of the original loan and you refinance for a larger amount for with a cash-out loan. Not only would you have a new 30-year mortgage but the principal and the interest on the larger loan might not be financially feasible.
Questions and Answers
Q: Is refinancing a waste of money?
The decision to refinance a mortgage should be based on your financial goals and situation. If you can lower your monthly payment and are comfortable with a new, longer-term loan, then refinancing isn’t a waste of money.
Q: How do I know if my refinance is worth it?
Use a refinance calculator to determine if you can secure a lower interest rate, reduce your monthly payment, and are comfortable with the break-even point of your loan.
Q: Why is refinancing not a good idea?
If the closing costs on the refinanced loan cause your monthly payment to be higher or you do not plan to be in the home for long, then refinancing may not be a good idea.
Q: What’s the catch with refinancing?
While there is no ‘catch’ involved in refinancing, it’s important to do your research, use a refinance calculator and consult your lender before deciding to refinance a home loan.
Q: What are the reasons not to refinance your home?
Refinancing a home could cost you more in the long run and impact your credit score.
Q: At what point is it worth it to refinance?
The decision to refinance a mortgage should be based on your financial goals and situation. But, if you want to lower your monthly payment, are trying the reduce the interest rate, change the terms of your loan, or take out cash from the equity accrued, then it might make sense to refinance your home. Use a refinance calculator and consult with your lender to see if it’s right for you.
Q: How long before you should refinance your home?
At a minimum, you must wait seven months before refinancing your home. During that time, all six mortgage payments must have been paid on time and in full.
Q: Is it a good time to refinance my home in 2022?
The decision to refinance your home in 2022 should take into consideration several factors, including the current interest rate on your loan, the length of time you have been in your home, the terms of your loan, your financial situation, and how long you plan to stay in your home. Use a refinance calculator and consult your lender to see if a refinance is right for you.
Q: Is it worth refinancing early?
In some situations, it makes sense to refinance early in the length of your loan if the difference between your current interest rate and the new interest rate is at least one percentage point. But remember, there are costs associated with refinancing a mortgage, and you are resetting the clock on the loan payoff. Use a refinance calculator to make sure refinancing a mortgage is right for you.
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