Refinancing your mortgage means replacing your existing home loan with a new mortgage. Homeowners may consider refinancing to change their interest rate, adjust their monthly payment, change the loan term, access home equity, or restructure their mortgage.
But refinancing isn’t automatically beneficial. A new loan can come with closing costs, fees, and a different repayment schedule. The right choice depends on your current mortgage, financial situation, home, and goals.
Before deciding whether refinancing makes sense for you, consider these seven factors.
1. What Is Your Current Interest Rate?
One of the first things to compare is your current mortgage interest rate with the rate available on a potential new loan.
A lower interest rate can potentially reduce the interest portion of your monthly payment. However, the interest rate should not be considered by itself.
A new mortgage may also involve closing costs and other loan charges. Comparing the overall cost of the new loan can give you a clearer picture than looking at the advertised rate alone.
2. How Much Could Your Monthly Payment Change?
Refinancing may change your monthly mortgage payment.
However, a lower payment does not necessarily mean that the new mortgage will cost less overall. For example, extending the repayment period can lower the monthly payment while increasing the amount of time you make payments.
When comparing loans, look at:
- Current monthly payment
- New estimated monthly payment
- Interest rate
- Loan term
- Mortgage insurance, if applicable
- Property taxes and homeowners insurance
- Total loan costs
The Consumer Financial Protection Bureau recommends reviewing the total monthly payment rather than focusing only on principal and interest.
3. Don’t Forget Refinancing Costs
Refinancing can involve many of the same types of costs associated with obtaining a mortgage.
These may include:
- Origination charges
- Appraisal fees
- Title-related costs
- Government fees
- Prepaid interest
- Insurance and escrow-related amounts
- Other lender or third-party charges
Some lenders may advertise “no-closing-cost” refinancing, but that does not necessarily mean the costs disappear. They may instead be covered through a lender credit or added to the loan balance.
That’s why it is important to compare the complete loan costs.
4. Consider How Long You Plan to Keep the Mortgage
Your timeline matters when evaluating refinancing.
If refinancing costs you money upfront, you generally need enough time for the potential savings from the new loan to offset those costs.
For example, suppose refinancing costs $6,000 and reduces your monthly payment by $250.
A simple break-even calculation would be:
$6,000 ÷ $250 = 24 months
In this simplified example, it would take 24 months to recover the upfront cost through the monthly payment reduction.
Actual refinancing decisions can be more complicated because the interest rate, loan balance, loan term, taxes, insurance, and other costs can change the calculation.
5. Look at the New Loan Term
A refinance can change how long you have to repay your mortgage.
For example, you might move from a longer remaining term to a shorter one. This could increase your monthly payment but reduce the time you carry the loan.
On the other hand, extending the loan term could reduce the monthly payment but mean making mortgage payments for a longer period.
Consider both:
Monthly affordability
and
Total cost over the period you expect to keep the loan.
The CFPB specifically notes that homeowners should understand whether a lower monthly payment is partly the result of extending the loan term.
6. Understand Your Home Equity
Your home equity is generally the difference between the value of your home and the amount you owe on mortgages secured by it.
Some homeowners consider refinancing to access part of their equity through a cash-out refinance.
However, using home equity can increase the amount secured by your home. The CFPB notes that cash-out refinancing can convert other debt into mortgage debt secured by the home, which can increase the consequences if the mortgage becomes unaffordable.
If you’re considering accessing equity, understand both the potential benefits and the additional obligations before proceeding.
7. Compare Loan Estimates Carefully
Don’t compare mortgages based only on the advertised interest rate.
When reviewing loan offers, look at:
- Interest rate
- APR
- Monthly payment
- Loan term
- Origination charges
- Other loan costs
- Lender credits
- Estimated cash to close
- Prepayment penalties, if applicable
The CFPB recommends comparing Loan Estimates and focusing particularly on lender-controlled costs when evaluating different offers.
A loan with a slightly different rate may have substantially different upfront costs, so looking at the complete picture is important.