What Are the Benefits of Refinancing Your Mortgage?

Do one thing: If you are considering refinancing, research and get quotes from several lenders (at least three) to find the best rate before taking the plunge.

When Should You Refinance A Home Loan?

Since interest rates have fallen a bit off their highs, you may be wondering if it’s finally time to try and get a better deal on your mortgage. 

The answer? It depends.

A refi is when you pay off your current home loan with money from a new, cheaper one.  There are several reasons you might want to refinance a mortgage, including:

1. Lowering your interest rate and monthly payment
2. Reducing (or occasionally increasing) the length of a loan 
3. Obtaining a fixed-rate mortgage to avoid paying more when an adjustable rate loan increases 
4. Cashing out equity to pay for home renovations, high-interest credit card debt, or some other purpose

Daniel Masuda Lehrman, CFP, founder and lead financial planner for Masuda Lehrman Wealth in Honolulu, says he sees the main benefit of refinancing a mortgage for his clients as lowering monthly payments. 

“The most common example is someone refinancing their high-interest 30-year fixed mortgage into a lower interest rate 30-year fixed mortgage, resulting in a lower monthly payment and total interest payments over the life of the loan,” notes Lehrman. “There are instances where refinancing a 30-year fixed mortgage into a 15-year mortgage may be beneficial, as it cuts the payoff time in half and significantly reduces the total interest paid. This scenario would make sense for someone who can afford the higher monthly payment and aspires to be debt free earlier.”

Do the Mortgage Math

Unfortunately, refinancing your current mortgage doesn’t come without costs. It typically can run between 2% and 5% of your loan. So, figure out what a refinance will cost you, then divide that number by the amount that you will save every month on the payments. The answer is the number of months you have to stay in the house to make the financial transaction worthwhile. 

Let’s say you determine the cost of the refinance is $1000, and that translates into a savings of $50 a month. You would need to stay in your home for at least 20 more months. This means that if you have no plans for moving in the next two years, a refinance could make sense. But if you do plan to move and sell the home in less than two years, it’s likely not in your financial best interest to refinance.  

Does It Pay To Refi?

Another way to determine if a refinance is worth the time, effort, and money is to look at how much you’re able to lower your interest rate.  The rule of thumb used to be that it didn’t pay to refi unless you could lower your rate by at least two percentage points – say from 8% to 6%. That’s no longer true.  Today, it can make sense if you can save as little as 1/2 or 1%.  To figure out if the math works for you, take the cost of the transaction and divide it by the monthly savings.  Think of the answer in months.  If you expect to remain in the house longer than that number of months, it’s typically worth it.

Pay Attention To Your Credit Score

You also need to make sure your credit score is at least as high as it was when you took out the loan. If it’s considerably lower, you may not qualify for a better rate. On the flip side, if your credit score has improved over time, you could qualify for an even better (lower) rate.

Use an Online Calculator

Fortunately, there are several online mortgage calculators to help you determine how much you could potentially save by refinancing your home loan. And those who use the SavvyMoney tool can also see what refinancing a home loan would look like using their online banking dashboard. 

Remember, though, these are only estimates, so the best way to get a clear picture of what a refinance will look like for you is to consult with multiple lenders, as mentioned above, to see who can offer you the best rate over the life of a new home loan. 

Pro tip: Make sure to let the lenders know that you are shopping around for the best deal. There’s often wiggle room when it comes to the fees charged in a mortgage refinance.    

Consider The Alternatives

And while there are benefits to refinancing, explains Filip Telibasa, CFP, owner and planner at Benzina Wealth, he has nudged some clients away from taking cash out of a first mortgage and instead suggested they apply for a home equity line of credit or home equity loan as an alternative.  

“My pushback to that is when you are refinancing a mortgage, you are doing so (often) for a longer period – 20 or 30 years,” he explains. “I do like refinancing the mortgage but purely from the perspective of reducing the interest rate. If it’s a debt consolidation or for a home renovation, it makes more sense to use the home equity line or home equity loan because you are not exposed to the interest rate for as long.”  

With reporting by Casandra Andrews