When Should I Refinance My Mortgage Loan?

There are many worthy reasons why you may want to consider a refinance of your mortgage loan. But are you ready for the process and cost involved? Is now the right time to pull the trigger? For that matter, when exactly is the ideal window for a refi? 

The answers will depend on several factors, including what interest rate you qualify for and your short- and long-term financial goals. Read on to learn more about why you should carefully consider the timing of a refi based on these and other circumstances. 

Why a mortgage loan refinance can be a smart idea

A mortgage refi serves as a financial tool that can help achieve important personal and monetary goals. 

“But it should only be considered if it improves your financial position or it falls into a specific strategy in your overall financial plan,” suggests Richard Staniszewski, CEO of Hera Title.

Carl Holman, director of communications and content for A&D Mortgage, seconds those sentiments.

“Refinancing a mortgage loan can be an excellent financial decision for several reasons,” he explains.

“It can lower your interest rate, which translates to significant savings over the life of your loan. It can reduce your monthly payments, providing more cash flow for other expenses or investments. It can help you switch from an adjustable-rate mortgage to a fixed-rate mortgage, giving you more stability and predictability in your payments. It can also be an opportunity to tap into your home equity for major expenses like home improvements, education, or debt consolidation.”

Financial advisor and investor Sana Khair, co-founder of Mayfair Properties, points to another compelling reason to refinance. 

“If you refinance to a shorter loan term, such as moving from a 30-year to a 15-year mortgage, it can lead to faster equity building and significant savings on overall interest paid, even though monthly payments may be higher,” she says.

Good Candidates For Refinancing

Those who particularly stand to benefit from a refinance include homeowners with high interest rates.

“If your current rate is significant only higher than the prevailing market rates, refinancing can be advantageous,” Kheir continues.

Another worthy prospect? A homeowner whose credit score has improved.

“If your score has gone up, you are more likely to qualify for lower interest rates,” notes Holman.

If you are expecting to remain in your home for several more years, you may also benefit from refinancing, as you will have enough time to recover the closing costs involved (more on this later) and reap substantial savings.

“Also, if you have earned significant equity in your home since closing on your current mortgage, you may benefit from better terms, plus the ability to pursue a cash-out refinance that involves tapping your home’s equity,” Holman adds.

Additionally, as mentioned earlier, borrowers with an adjustable-rate mortgage should also ponder a refi, especially if they are nearing the end of their fixed rate period and rates are due to climb higher.

The best times to consider a refinance

The right reasons and candidates for a refi also align with opportune times to refinance. The experts agree that a mortgage loan refinance is most advantageous at the following times:

• When you can lower your interest rate. If your current mortgage rate is significantly higher than prevailing market rates, refinancing can pay off. “Here, the cheaper costs of borrowing can be a win in the form of reduced monthly payments and a reduction in overall loan interest paid over time,” says Staniszewski. “But you must consider the cost of the actual refinance versus both the short-term and long-term benefits. While a quarter of a point reduction may not be enough to move the needle, being able to lower your rate by half a point or more could yield significant financial benefits that make refinancing worth it.” Case in point: Let’s say your current mortgage rate is 7% and you owe $300,000 on a loan that has 28 years left. If you were able to refinance to a 6% fixed rate over 30 years, you could lower your monthly payments from $1,996 to $1,799 and pay $23,141 less in total interest over the life of the loan.
• When you need more cash flow and seek lower monthly payments. By lowering your rate, you should be able to decrease your monthly principal and interest payments. Using the previous example, a refi that takes advantage of an interest rate reduction of 100 basis points (from 7% to 6%) could yield a $197 savings monthly. 
• When you seek more flexible payments. Or, you could capitalize on a lower rate but lengthen your term, which should bring down your monthly payment. Case in point: Assume your current rate is 7% on a loan that has 14 years left and an outstanding balance due of $300,000. If you refi to a new 6% fixed rate but reset the term to 20 years, you can lower your monthly payments from $2,696 down to $2,149, reaping a $547 monthly savings. You’ll add 6 more years to your loan repayment schedule and pay an additional $62,902 in total interest, but your monthly mortgage bill will be more manageable.
• When you want to tap your equity for financial goals. You can pursue a cash-out refinance and use the liquidated equity you take out at closing to pay for a particular objective—such as funding a home improvement project, paying college tuition, or paying down high-interest credit card debt or other shorter-term debt. “Here, you borrow more money than the principal of your current mortgage and use the excess to pay down debt or fund another goal,” says Staniszewski. The timing can be right if your home has appreciated in value and you’ve paid down your principal significantly since taking out your current loan.
• When you desire more predictable payments. If you have an adjustable-rate mortgage, refinancing to a fixed-rate mortgage can be an attractive option, particularly if your loan’s fixed-rate period has ended or is set to end soon, after which time your rate can go up or down—a situation that can cause affordability stress and uncertainty.

Avoid refinancing during these times

On the other hand, it’s probably wise to steer clear if the timing isn’t right. Poor timing circumstances include:

• You can’t significantly lower your interest rate. “If so, the savings might not justify the costs involved. Homeowners with already low interest rates might not benefit enough from a refi,” says Holman, who recommends only refinancing if you can drop your rate at least a half a point or more. 
• You believe rates will soon drop further. While no one can predict where mortgage rates will land tomorrow or in the near future, “refinancing can be a bad move if interest rates look like they’re going to drop further in the short term,” says Martin Orefice, CEO of Rent To Own Labs. “You may want to wait until interest rates have stabilized or switch to an adjustable-rate mortgage to take advantage of further rate drops.” 
• You plan to sell your home in the next few years. Refinancing will come with expensive closing costs. Ideally, you’ll want to stay put for at least as long as it will take to recoup these closing costs, assuming you’ll be paying less in the form of a lower interest rate.
• You can’t afford the closing costs. Even if you don’t plan to move anytime soon, expenses associated with the refinance will be due at the time of closing and can easily cost four to five figures.
• Your credit or finances have worsened. If your credit score has dropped, your financial situation has worsened, your job security is tenuous, or you’ve become self-employed since you closed on your current mortgage loan, you may not get favorable refinance loan terms. 

Closing Cost Considerations

Here’s the thing about closing expenses: They typically equate to around 2% to 5% of your total loan amount. Using the previous example of a $300,000 mortgage loan, this could equate to $6,000 to $15,000, due in a lump sum by your closing date. 

“To determine if refinancing is worthwhile, you need to calculate the breakeven point. If your closing costs are $6,000 and you save $200 monthly, it will take you 30 months to recoup the closing costs,” continues Kheir.

Thankfully, there are strategies to save on closing costs.

“Some lenders offer no-closing-cost refinancing, which means the closing costs are rolled into the loan balance or exchanged for a slightly higher interest rate,” Holman says.

“Additionally, your lender might waive the need for a new appraisal, which can cost a few hundred dollars, if they use an automated valuation model or if your home has been appraised recently.”

Your best bet? “Shop around among different lenders and compare refinance loan offers carefully. Also, negotiate with your chosen lender for lower fees, or seek a lender credit in exchange for a slightly higher interest rate,” Kheir advises.

The Bottom Line

Don’t feel pressured to beat the clock on a mortgage refinance: Pursue this option when you feel the time is preferable for your needs and financial objectives. 

“But be cautious before committing. Ensure you have a stable financial situation, as job instability or fluctuating income could affect your ability to secure favorable terms or afford the refinance loan,” cautions Kheir.

“Also, be mindful of resetting your loan term. Refinancing a 30-year mortgage after 10 years back into a new 30-year term, for instance, will almost certainly increase your total interest payments dramatically.”