Mortgage Refinance

When You Should Refinance Your Mortgage [Rule of Thumb]

Learn more about the different factors you should consider when deciding to refinance your mortgage.

Refinancing your mortgage can be a great way to save money in the short-term and long-term. When mortgage rates go down (or stay low), it’s a good time to consider refinancing your mortgage. But there are many factors to weigh when deciding the best time is to refinance. We’ve laid them out here. 

What is refinancing?

Refinancing is when you use a new mortgage to pay off your existing mortgage. This means your new mortgage comes with new conditions and usually a different interest rate. Refinancing can decrease your interest rate, lower your monthly payments, or shorten your overall mortgage length – all in an effort to save money and help you reach your financial goals.

When are interest rates best?

When interest rates are low, it’s usually a good time to consider refinancing. It’s a good rule to refinance if you can reduce your interest rate by at least 1%. Mortgage rates naturally rise and fall. But, when the economy struggles, mortgage rates usually fall.

Just because interest rates are low, though, doesn’t mean it’s the best choice for you to refinance. Consider the following additional factors before deciding to go ahead and refinance.

Determine your goal for refinancing

If your goal is to decrease your monthly payment, it’s important to consider whether the new loan terms are really better. 

For example, lower monthly payments might mean that the mortgage term is actually much longer, which saves you money on your monthly payment but costs you much more in the long term.

If you are looking for lower interest rates, it might be wise to try and get a loan that keeps your monthly payment about the same. While it can seem like you aren’t saving any money immediately, you will save a lot by significantly shortening the time to pay back your loan. 

Deciding why you want to refinance can guide the new mortgages that you shop for and help you determine if you are getting a better deal.

Consider how much you owe and how long you’ve had your mortgage 

It costs money to refinance your loan. Often it can cost up to 5% of the principal. If you only have a short time left on the mortgage, you may not be able to reap the full benefits of refinancing.

And typically, if you refinance too soon after taking out your mortgage, interest rates will not have changed enough to benefit you significantly. However, sometimes outside factors have huge effects on the economy, and that can cause larger-than-average swings in interest rates. So even if you just got a new mortgage a year or two ago, it’s worth it to check the current interest rates and compare them to what you already have.

Consider the kind of loan you have

If you have an adjustable-rate mortgage (ARM), you may reap the benefits of falling interest rates without the need for refinancing. On the flip side, ARMs usually come with a fixed, low-interest rate period at the beginning of the mortgage term. If that period is coming to an end and the adjusted interest rate will be higher than those available if you refinance to a fixed-rate mortgage, it might be a good idea to switch over.

On the other hand, if you have a fixed-rate mortgage and it seems like interest rates will continue to fall, switching to an ARM can mean you can take advantage of those falling rates over time without refinancing. This can save you money!

Consider your credit score

If you had an incredible credit score when you took out your mortgage, but your credit card debt has recently gotten out of hand, you might be in a tough spot. If your credit score is worse than when you originally got a mortgage, you might not be able to access the same loans that you could before. This can mean that you will likely end up paying more for any mortgages you refinance with.

Alternatively, if your credit score has improved since you took out your last mortgage, you might be eligible for better rates and terms.

Consult a calculator

Using a mortgage calculator to help you determine how much you will save by refinancing can help make sense of all the numbers you have to consider.

When consulting a calculator, have your home value, remaining mortgage balance, current monthly payment, and current mortgage conditions handy. Enter this information into a mortgage-refinancing calculator to determine whether you will save money by refinancing. 

Keep in mind, calculators are not perfect, and you might have to weigh the actual costs of refinancing separately.

Deciding when to refinance your mortgage

Overall, there’s no one-size-fits-all way to decide if you should refinance your mortgage. However, as a general guide, be sure to do the following: 

1. Watch for interest rates that are 1-2% lower than your current rate

2. Be wary of loan terms that make you pay more in the long term - use a calculator!

3. Watch out for your credit score                                                     

Learn more about the competitive mortgage rates that Listerhill has to offer.

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Common Links

Frequently Asked Questions

  • What does Interest-Only Mean?

    With an interest-only loan, you are only responsible for paying the interest on the amount you draw from the construction loan each month. 

    Here’s an example. 

    If you draw $15,000 in January, you pay 4.99% on $15,000

    If you draw an additional $25,000 in February, you pay 4.99% on $40,000 ($15K from January + $25K from February)

  • What is a Construction Loan?

    A home construction loan provides you with financing to build your dream home. 

    With terms up to 12 months, this short-term loan covers your costs, including land, contractor labor, building materials, and more, until your home receives an occupancy certificate.  

    Once your home is ready to move in, you will then secure a traditional home mortgage.

  • You might prefer an adjustable-rate mortgage over a fixed-rate mortgage if...

    • You plan to move before the introductory rate expires.
    • You want a lower payment during your initial payment period.
    • You think rates will drop in the future.
    • You are planning on relocating before the rate adjusts
    • You know you will be paying off the loan in a few years
    • You need to move fast and have limited time to secure a down payment
    • You do not qualify for a 30-year fixed-rate mortgage, but want a 30-year payment schedule
    • Your payment could decrease if the index against which your ARM is benchmarked drops
  • A 5/5 adjustable rate-mortgage is right for you if...

    A 30-year ARM with a fixed interest rate for the first five years, then fluctuating every five years. 

    A 5/5 ARM is best if you want to lock in a low rate over a longer period and maintain the same rate over an extended time. 

    With a 5/5 adjustable-rate mortgage, you can go 10 years with only one rate adjustment, whereas with other lenders, you could experience up to six rate changes in the same time period.

  • A 3/3 adjustable-rate mortgage is right for you if...

    A 30-year ARM with a fixed interest rate for the first three years, then fluctuating every three years

    A 3/3 ARM is best if you want to lock in the lowest rate, but over a shorter period and are okay with the rate fluctuating more often.