Refinancing 101: When It Makes Sense (and When It Doesn't)
Intro
Refinancing is basically replacing your current mortgage with a new one. Done at the right time, it can lower your payment, shorten your term, or help you access cash. Done at the wrong time, it can cost you more than it saves.
1. Lowering Your Rate or Payment
The classic reason to refinance is to lock in a lower rate. But you also have to consider closing costs. Your loan officer can calculate:
- New payment
- Total closing costs
- How many months it takes to "break even"
If you'll be in the home longer than the break-even point, it often makes sense.
2. Shortening Your Term
Moving from a 30-year to a 20- or 15-year loan can help you pay off your home much faster. Sometimes you can shorten the term without increasing your payment as much as you'd expect, especially when rates drop.
3. Cash-Out for Projects or Debt Consolidation
A cash-out refinance lets you tap into your equity to:
- Renovate
- Pay off higher-interest debt
- Build reserves for future opportunities
You'll want to weigh the new mortgage payment against the monthly relief you get elsewhere.
4. When Refinancing Might Not Be Worth It
It may not be the right time if:
- You plan to sell soon
- Your credit has dropped significantly
- The savings are tiny compared to the costs
A quick review of your current mortgage statement and a rate quote can give you a clear answer.