You've probably heard that refinancing could lower your monthly payment. But what does that actually mean for your loan, and is it worth exploring right now?
The honest answer is: it depends. Refinancing can reduce what you pay each month or over the life of your loan, but how much you save varies from one homeowner to the next.
A good starting point to determine if a refinance could be right for you is asking yourself three questions:
A "yes" to any one of these is a reason to take a closer look, but the amount you could save depends on a combination of factors unique to your situation.
When you refinance, you're replacing your existing mortgage with a new one. Your loan balance, loan term, and sometimes your loan type can all change. Your repayment clock resets, and your monthly payment is recalculated based on the new terms.
A lower monthly payment isn't automatic. It's the outcome of how your new loan compares to your old one.
Several things influence how much you could save:
A homeowner five years into a 30-year loan is in a very different position than someone twenty years in, even if their balances look similar on paper.
One of the most common questions people ask is how much rates need to drop before refinancing is worth it. A general rule of thumb is that a 1% drop from your current rate could lead to meaningful savings, but this is dependent on your current mortgage terms, including your interest rate, balance, and loan term.
What you should really focus on when deciding whether a refinance is worth it is:
These numbers can help determine your break-even point.
The break-even point tells you how long it will take for your monthly savings to cover what you spent on closing costs. Once you hit that point, you're in positive territory.
Yes, refinancing a mortgage comes with closing costs, just like your original mortgage did. These typically run between 2% and 3% of your loan amount. On a $200,000 loan, that's anywhere from $4,000 to $6,000 out of pocket at closing. These costs can be rolled into your new loan so you don’t have to come out of pocket at closing.
That upfront cost is what you're measuring your future savings against.
Your break-even point can be calculated by dividing your total closing costs by your monthly savings: closing costs / monthly savings = break-even point.
If your closing costs total $6,000 and your new loan saves you $150 per month, your break-even is 40 months, or a little over three years.
If you plan to stay in your home beyond that point, refinancing could make financial sense. If you're likely to move or sell before then, the savings may not be enough to justify the upfront cost.
A mortgage calculator can help you run these numbers with your actual loan balance and estimated costs.
Saving on your monthly payment is the most common reason homeowners refinance, but it's not the only one. Depending on your situation, refinancing might make sense for other reasons entirely.
Accessing Your Home's Equity
If your home has increased in value since you took out your original loan, you may have built up significant equity. A cash-out refinance lets you borrow against that equity and receive the difference as cash at closing.
Homeowners use cash-out refinances for a variety of purposes: home improvements, consolidating higher-interest debt, covering a major expense, or investing in another property.
It's worth understanding the full picture before moving forward, but for many homeowners, the equity in their home is one of their most valuable financial assets.
Switching From an Adjustable Rate to a Fixed Rate
If you currently have an adjustable-rate mortgage, your payment can change when the rate adjusts. Refinancing to a fixed-rate loan locks in a consistent payment for the remainder of your loan term, which can make budgeting more predictable and remove the uncertainty of future rate adjustments.
Changing Your Loan Term
Refinancing also gives you the opportunity to restructure how long you'll be paying your mortgage. Moving to a shorter term means you'll pay less interest over the life of the loan, and you'll build equity faster. Moving to a longer term can reduce your monthly payment if your financial situation has changed and you need more breathing room.
Refinancing works best when the timing aligns with your financial situation and your plans for the home.
Situations Where Refinancing Often Pays Off
These are some of the circumstances where refinancing tends to make the most sense:
When It May Not Be the Right Move
Refinancing doesn't always pencil out. A few situations where it may not make sense:
Being honest with yourself about these scenarios is part of making a smart decision. An experienced loan officer can help you look at the numbers clearly.
The savings potential is real, but it looks different for every homeowner. Running the break-even math is the most practical way to see whether the numbers work in your favor.
If you'd like help reviewing your options, our team at Standard Mortgage Corporation is here to assist. Reach out to one of our loan officers for a personalized conversation.