When Refinancing Your Mortgage Is Worth It (And When It’s Not)


Refinancing your mortgage is a great way to save money on your home.  With mortgage rates dipping, you may be thinking about a refinance of your mortgage. So should you?

Whether or not you should refinance depends on your mortgage and current financial situation.

When you refinance your home, you pay off your current mortgage in full by taking out a new mortgage.

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There are three common scenarios for refinancing:

  1. You want to score a lower interest rate and/or gain quick equity.
  2. You have a home equity loan in addition to your mortgage and you’d like to combine your loans.
  3. You can’t make your monthly payments, so you want to get into another plan to save your home.

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There are a few specific reasons why you might want to refinance your mortgage:

Changing the loan length

If a new loan offers you a lower interest rate at the expense of a longer mortgage term, it might not be worth it. Longer loan terms mean more money paid in interest and a slower gain in equity.

But if you have a shorter loan, say a 15-year fixed-rate mortgage, and want to refinance into a 30-year loan because the monthly payments are too tough, it’s probably a smart idea. Be sure to get a mortgage without any prepayment penalties and pay more toward your principal each month.

Increasing monthly payments

You can refinance to increase your monthly payments in order to gain equity faster. However, if you don’t have prepayment penalties or a high interest rate, you should just funnel extra cash toward your mortgage payments each month. If you do have prepayment penalties, it’s probably a wise decision to refinance into a loan without them.

Cash-out refinancing

Cash-out refinancing is when you take out a new mortgage that’s larger than your current one. The difference between the two loans is paid out in cash.

If you’re in financial distress and need some cash, this move may help. Cash-out refinancing usually offers a lower interest rate than a credit card, but it puts your home on the line. Plus, the overall interest you pay on the new mortgage may be significantly more, because it’s over the term of many years.

Recouping closing costs

A new interest rate may be great, but because it takes money to refinance, you need to determine how many months it’ll take before you recoup any closing costs.

Check out our mortgage calculator to figure out how long it will be before you’ll see real savings, and how much you’ll save over the life of the loan. Don’t forget to shop around and check your good-faith estimate with your settlement statement for junk fees.

Updated from an earlier version by Deena Weinberg

For more smart financial news and advice, head over to MarketWatch.

Craig Donofrio covers home finance and all things real estate for realtor.com. His work has been featured in outlets such as The Street, MSN, and Yahoo News.
Follow @CJDonofrio

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interest ratesmortgagesrefinancing