Planning to refinance

Refinancing your mortgage can be advantageous for many reasons, but knowing when, how and at what cost is essential to your success.

During the term of your mortgage, you may want to refinance to meet a variety of personal and financial goals. Refinancing will completely replace your current mortgage with a new loan that provides you with a new term, rate and monthly payment. Refinancing will involve time and money, so be sure to talk with your lender about the costs and benefits of securing a new loan.

You can refinance through your existing lender or a new lender. What’s most important is that the lender you choose is trustworthy and offers competitive rates and terms. The best way to determine if you’re being offered competitive terms is to shop around and compare Loan Estimates from several lenders.

Most common reasons to refinance:

  • Lower your mortgage rate. If mortgage rates are lower than when you closed on your current mortgage, refinancing could reduce your monthly payments and the total amount of interest you pay over the life of the loan.

  • Move from one mortgage product to another. If your current mortgage is an adjustable-rate mortgage (ARM) and it no longer makes sense for your situation, refinancing into the security and stability of a 30-year fixed-rate mortgage may be a good decision.

  • Build equity faster. If your financial situation has improved since your purchase, refinancing to a loan with a shorter term (e.g. from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage) will allow you to build equity faster, own your home sooner and pay less in total interest.

  • Get cash-out. If you’ve built up significant equity in your home over the years and could use this money for home improvements or to improve your financial situation, it might be a good time to talk with your lender about a cash-out refinance.

Does refinancing make sense?

A quick check to see if refinancing makes financial sense is to calculate how long it will take to recoup the costs of the refinance. To do this, simply take the total cost associated with the refinance and divide it by your monthly savings. Note that this model will not work for cash-out refinances or if you are refinancing to reduce the term of your loan.

woman calculating how long it will take to recover the costs of refinancing her home

There are many other variables to consider. For example:

  • If there’s a chance you may move in two years, but it will take you three years to recoup the cost of refinancing, it probably does not make financial sense.

  • If you have 20 years left on your 30-year fixed-rate mortgage and you refinance into a 30-year fixed-rate mortgage, you’ve essentially extended the term of your loan and will pay more interest over the life of the loan as a result.

Reach out to your lender to discuss your situation and evaluate what’s right for you. Also, check out our calculators to quickly determine if you are better off refinancing and to understand the costs associated with your refinance.

Costs of refinancing