When Should You Refinance Your Mortgage?

As interest rates fluctuate, you may consider refinancing your mortgage to a lower interest rate, shorter loan term, or lower monthly payment. You may want to switch from an adjustable rate to a fixed-rate loan, or get rid of private mortgage insurance, or borrow more money for value-adding renovations to your home. To ensure you’re making the right decision financially, you must carefully weigh the costs of refinancing against the potential savings.

Refinancing your mortgage from 7.5% to 6.5% can save you about $269 a month on a $400K loan, reducing your monthly payment by nearly 20%. You’ll have closing costs—just as you did on your purchase loan—of approximately $8,000. It will take 2.5 years to break even, so the longer you stay in your home, the more you’ll save. For a half-point difference, it will take five years to break even.

Some lenders will give you a no-closing cost option in exchange for a higher interest rate on your refinance. New terms apply, so plan to stay in your home for a few years more.