Refinancing Benefits: When is it a Good Time to Refinance?
When to refinance mortgage is one of the most common questions homeowners ask, and the answer can save you tens of thousands of dollars over the life of your loan. Refinancing replaces your current mortgage with a new one, ideally with better terms, a lower interest rate, or a different loan structure that better fits your financial goals. At Integrity Home Lending, we help homeowners across 13 states determine the best time to refinance and secure optimal terms.
What Is Mortgage Refinancing?
Mortgage refinancing is the process of paying off your existing home loan and replacing it with a new one. The new loan pays off your old mortgage balance, and you begin making payments on the new loan going forward. Homeowners refinance for many reasons, including lowering their monthly payment, reducing their interest rate, shortening their loan term, or accessing their home equity.
Understanding when to refinance mortgage terms makes the difference between saving money and wasting it on unnecessary closing costs.
When to Refinance Mortgage: 7 Best Times to Consider It
Knowing when to refinance mortgage loans requires evaluating several financial factors. Here are the seven most common scenarios where refinancing makes sense:
1. Interest Rates Have Dropped
The most common reason to refinance is when market interest rates fall below your current rate. A general rule is that refinancing becomes worthwhile when you can reduce your rate by at least 0.5 to 1 percentage point. On a $300,000 mortgage, dropping from 7 percent to 6 percent saves approximately $200 per month.
2. Your Credit Score Has Improved
If your credit score has improved significantly since you took out your original mortgage, you may qualify for a better rate even if market rates have not changed. A credit score increase of 50 to 100 points can result in meaningfully better loan pricing.
3. You Want to Shorten Your Loan Term
Switching from a 30-year to a 15-year mortgage typically comes with a lower interest rate and dramatically reduces the total interest you pay. While your monthly payment increases, the long-term savings are substantial.
4. You Need to Access Home Equity
A cash-out refinance allows you to borrow against your home equity for major expenses like home improvements, debt consolidation, or investment opportunities. This is particularly relevant for homeowners who have built significant equity through appreciation or principal payments.
5. You Want to Switch Loan Types
Homeowners with adjustable-rate mortgages often refinance into fixed-rate loans for payment stability. Conversely, if you plan to sell within a few years, switching from a fixed rate to an ARM could lower your payments in the short term. Understanding the differences between FHA and conventional loans can help you choose the right product.
6. You Want to Remove Mortgage Insurance
If you originally put less than 20 percent down and are paying private mortgage insurance, refinancing once you reach 20 percent equity can eliminate that monthly PMI cost. This is especially true for FHA loans, where mortgage insurance typically remains for the life of the loan unless you refinance into a conventional mortgage.
7. You Want to Consolidate Debt
High-interest credit card debt or personal loans can be consolidated through a cash-out refinance at a much lower mortgage rate. This strategy works best when you have the discipline to avoid accumulating new debt after consolidation.
Types of Mortgage Refinancing
There are several refinancing options available depending on your goals:
Rate-and-Term Refinance: This is the most straightforward type. You replace your current mortgage with a new one that has a different interest rate, loan term, or both. No cash is taken out beyond what is needed to pay off the existing loan and closing costs.
Cash-Out Refinance: You refinance for more than you owe and receive the difference in cash. This is ideal for homeowners who need funds for renovations, investments, or debt consolidation. Learn more about cash-out refinancing options.
Streamline Refinance: Available for FHA, VA, and USDA loans, streamline refinancing offers a simplified process with reduced documentation requirements. These programs often do not require a new appraisal, making them faster and less expensive.
DSCR Refinance: For real estate investors, DSCR loan refinancing qualifies based on the property’s rental income rather than the borrower’s personal income. This is ideal for investors who want to refinance investment properties. You can also learn how to calculate your DSCR ratio to see if you qualify.
How to Calculate Your Break-Even Point
Before deciding when to refinance mortgage terms, calculate your break-even point. This is the number of months it takes for your monthly savings to recoup your closing costs.
The formula is simple: divide your total closing costs by your monthly savings. For example, if refinancing costs $6,000 and saves you $200 per month, your break-even point is 30 months. If you plan to stay in your home longer than 30 months, refinancing makes financial sense.
Keep in mind that the break-even calculation should also account for any changes in your loan balance or term. Use our affordability calculator to model different scenarios.
Step-by-Step Refinancing Process
The refinancing process follows a similar path to your original mortgage application:
Step 1: Evaluate your goals. Determine why you want to refinance and what terms you are seeking. Are you focused on lowering your payment, shortening your term, or accessing equity?
Step 2: Check your credit and finances. Review your credit reports and scores. Gather recent pay stubs, tax returns, and bank statements. Your credit score and debt-to-income ratio will determine the rates available to you.
Step 3: Shop for rates. Compare offers from multiple lenders. Even small differences in rates and fees can add up to significant savings over the life of your loan.
Step 4: Apply and lock your rate. Submit your application and provide required documentation. Once approved, lock your interest rate to protect against market fluctuations during the closing process.
Step 5: Appraisal and underwriting. Your lender will order an appraisal to confirm your home’s value. The underwriting team reviews your application, documents, and property value.
Step 6: Close on your new loan. Review and sign your closing documents. Your new lender pays off your existing mortgage, and you begin making payments on the new loan.
Common Refinancing Costs to Expect
Refinancing is not free. Typical closing costs range from 2 to 5 percent of the loan amount. Common fees include the application fee, appraisal fee, title search and insurance, origination fee, and recording fees. Some lenders offer no-closing-cost refinancing, but this usually means a slightly higher interest rate.
Understanding these costs is essential to determining when to refinance mortgage loans profitably. Always request a Loan Estimate from your lender to see the full breakdown of costs before committing.
Common Mistakes to Avoid When Refinancing
Many homeowners make costly errors when deciding when to refinance mortgage terms:
Ignoring the break-even point: Refinancing without calculating how long it takes to recoup costs can result in losing money, especially if you move or sell before reaching break-even.
Extending your loan term: Refinancing a mortgage with 20 years remaining into a new 30-year loan lowers your payment but dramatically increases total interest paid. Consider the total cost, not just the monthly payment.
Not shopping around: Accepting the first offer you receive could mean missing out on better rates or lower fees from competing lenders.
Cashing out too much equity: While cash-out refinancing can be strategic, borrowing too much against your home puts you at risk if property values decline. Maintain a healthy equity cushion.
Get Started with Integrity Home Lending
Understanding when to refinance mortgage terms is the first step toward significant savings. Whether you are looking to lower your rate, shorten your term, access equity, or switch loan types, the mortgage experts at Integrity Home Lending can help you evaluate your options and find the best solution.
We serve homeowners across Alabama, Alaska, Colorado, Florida, Georgia, Maryland, Mississippi, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, and Virginia. Get pre-qualified today to see your refinancing options, or contact our team with any questions about your specific situation.
