When you refinance a mortgage, you’re taking out a new loan with more favorable terms to pay off a mortgage you already have. For most borrowers, the best time to do this is when you can get an interest rate that’s lower than the one on your current mortgage.
Depending on your priorities, bringing the interest rate down can help you accomplish a variety of goals:
It’s not quite as simple, though, as waiting for mortgage interest rates to drop and refinancing at the first opportunity. Personal factors, such as your overall financial health and goals, as well as your future moving plans, also determine when and whether refinancing delivers the best value.
In this guide, we’ll walk you through five key considerations:
We’ll also point you towards some user-friendly tools for doing refinance math, as well as some trustworthy lenders for you to compare.
First things first: If you’re trying to catch the moment when rates are lower than they were when you last financed your home, you need to know where they stand right now.
The Consumer Financial Protection Bureau, a regulatory agency, is a source of accurate and up-to-date information. It tracks mortgage lending rates across the country and publishes fresh data twice a week (Wednesday and Friday). Its website uses easy-to-read graphs and visuals to show the rates lenders are offering in your state. It also provides interactive tools for calculating how much a certain interest rate will cost you over different loan periods.
For news, expert opinions, and analysis on mortgage interest rates, it’s also worth bookmarking Money Magazine’s “Rates” page. There, you’ll find almost daily updates and predictions on the direction of the market, easily consumable information on the latest developments, and tips for finding the right mortgage.
Timing your refi for when you can get a 2% interest rate reduction is traditionally thought of as the best option, but as Money says, “In general, this move makes the most sense if you can lower your rate by at least one percentage point.”
In addition to looking out for lower interest rates, you need to consider the type of loan you already have. Is it an adjustable-rate mortgage (ARM) or a fixed-rate mortgage? Switching from one to the other could be a way to decrease your interest payments.
Let’s break this down into options for either mortgage type when interest rates go lower (or higher).
When interest rates are low, it could be an excellent time to refinance from a fixed-rate mortgage to an ARM.
With a fixed-rate mortgage, you make the same payment every month – an arrangement most borrowers prefer because it’s stable and predictable. However, if you’re sitting at a fixed rate when interest rates drop, you could be paying more than you have to.
The payments on an ARM, however, are periodically adjusted to remain in line with interest rates. This means they can go up, which often intimidates borrowers, but it also means that when interest rates are lower, so are your monthly payments. And as long as interest rates stay low, you’ll continue to save money.
When you already have an ARM and mortgage interest rates are low, staying where you are may be the best choice unless you have other reasons for switching. For instance, changing to a fixed-rate mortgage eliminates concerns about ARM interest rates going up again in the future and bumping up your monthly payments.
ARMs can start out with very low interest rates for a set period, after which those rates begin to vary and may go up. When this happens, it can make sense to move in the opposite direction: transition to a fixed-rate mortgage with a lower interest rate.
In deciding whether or not the time is right to take a refinance loan, you need to factor in not just what’s going on in the market but also in your personal financial circumstances. This includes things like:
On the one hand, if your credit score has gone down since you took out your original mortgage, it might be best to hold off on any refinancing plans until you can build up better credit, as it’s likely to be more difficult to get approval. (Also, every time you apply, the lender runs a hard inquiry on your credit report, which can drop your score further.)
On the other hand, if your credit score has gone up, you may now qualify for a better interest rate, so it’s worth making some inquiries with lenders. You could start by checking out how your improved score is likely to impact offers by using Money’s online refinance calculator.
If you’ve been making your mortgage payments on time and in full and have managed to build up enough equity in your home (usually around 20% or more), you could save money by refinancing without private mortgage insurance (PMI). Traditional mortgage lenders usually insist that you pay for PMI if your down payment was less than 20% of the original loan amount – refinancing now could be a way to eliminate that extra cost.
Perhaps you’re considering refinancing because you need to reduce the size of your monthly payments or access some of your home’s equity (to pay for home renovations or other expenses). If so, then this may be the determining factor in deciding when to refinance a mortgage.
To bring down your payments, you can choose to refinance with a longer loan term, stretching the money you owe out over more installments and reducing the size of each one.
A cash-out refinance loan, also called an equity pay out, is when you take out a new mortgage for more money than what you owe currently, and you get the difference in cash at the cost of the new loan. This is often used as a way of accessing money while avoiding higher cost loans for things like home improvement or other projects.
Maybe your financial situation has improved and you’re now in a position to pay off your mortgage quicker than you originally thought. In this case, refinancing with a shorter loan term may work well. This means that your monthly payments will increase, but if you time the move to coincide with a drop in interest rates, you could find that the increase is very manageable.
How soon you can refinance a mortgage depends on the terms you’ve agreed on with your current lender and the requirements of your new one. Sometimes you can do it right away, but there are circumstances in which you’ll have to wait. Unfortunately, this can leave you with less freedom to take advantage of the best mortgage interest rates when they’re available.
You may be subject to an obligatory waiting period if:
It might also be best to choose to wait if your current lender will apply a prepayment penalty should you refinance or sell your home before a certain number of years has passed.
The length of time you plan to stay in your home determines whether refinancing at this time is worth it for you.
If you expect to live in your house for a few years but it’s not your forever home, and interest rates are currently low, switching from a fixed-rate mortgage to an ARM as described above can be a good idea. This is an opportunity to bring down the interest rate and pay less monthly without worrying about rates going up again in the longer term because you’ll be moving on in any case.
If rates continue to fall or stay low, stick with the ARM. It will continue to give you decreased interest rates and lower monthly payments, so you won’t have to think about refinancing again every time interest rates drop. If they start going up again, you can always consider a switch back to a fixed rate.
According to Rocket Mortgage, closing costs for refinancing are usually around 2–3% of your loan’s total value, while Freddie Mac says that average closing costs are over $5,000 including tax. If you’re planning on living in your home for less time than it would take to get back that money, even with the better rate, then this probably isn’t the right time to refinance.
“As a general rule,’ says Rocket, “you need to live in your home for at least a year to gain a financial advantage through a refinance.”
Unfortunately, it isn’t just closing costs that you have to think about. Refinancing can involve a range of expenses that aren’t immediately obvious. These may include things like:
To work out whether a refinance offer is a good deal, you need to calculate what’s called your “break-even point.” This is the point at which a refinance loan starts to make good financial sense, taking the factors we’ve discussed above into account. To find your break-even point, you need to total all the costs that come with the refinance and divide them by the amount you’d be saving each month with the new loan.
Thankfully, there are some excellent refinance calculator tools available online, and for free, from trusted lenders such as Rocket, as well as Better Mortgage and Guild Mortgage.
The calculator for Rocket mortgage refinance rates is probably the most straightforward. It factors in your goals for refinancing, your mortgage balance, the value of your home, your zip code, and your credit score. Better Mortgage, meanwhile, allows you to add more details, such as your desired length of loan term and the property type. With Guild, you can also enter the closing costs. Guild and Rocket both provide guides to interpreting the calculation results.
As with any important decision you’re making about your finances or credit, it pays to know what your options are. Getting the timing just right on a refinance loan will depend on what’s available to you.
“Don’t settle for the first interest rate that a lender offers you,” says Money. “Check with at least three different lenders to see who offers the lowest interest. Also, consider different types of lenders, such as credit unions and online lenders, in addition to traditional banks.
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