Should You Refinance Your Mortgage?

Homeowners decide to refinance their mortgage for a variety of reasons. Many like the idea of lower interest rates, while others justify their choice on the basis of their credit score. In other words, the question, "Should I refinance my mortgage?" has different answers, depending on your situation. 

Some homeowners benefit from mortgage refinancing, but this isn't always the case. It's crucial to look at all of your available options within your specific set of circumstances. Just because another person in a similar position has saved money with refinancing, doesn't mean you'll enjoy those same advantages.

With this in mind, you should set aside time to weigh the positives and negatives of refinancing your mortgage before moving forward. Once you have an informed understanding of the subject, you'll feel far more comfortable when you make your final decision.

When it comes to refinancing your mortgage, there are three primary points to consider — interest rates, credit score and break-even point. At the end of the day, you'll only want to refinance if it saves you money, and this post will help you know what number you'll need to crunch to figure this out.

1. Why Would You Refinance Your Mortgage?

As mentioned earlier, homeowners often cite the allure of lower interest rates as their primary motivation for refinancing a mortgage. According to the White House, the average homeowner could save $3,000 every year if they choose to refinance.

Another popular reason for refinancing is an improved credit score. Your mortgage can vary by as much as 1.5 percent based on your score, and those numbers can have serious repercussions for your monthly payments. If you have a mediocre score, it can add a significant sum of money to what you already pay.

Refinancing can also reduce your monthly mortgage payments because when you refinance your mortgage to a term that's longer than what's left on the mortgage, you'll spend less month by month. However, this isn't advisable, as you'll end up paying far more money in interest over the long run.

2. What Can It Cost to Refinance?

If one or more of the reasons above have captured your attention, you're likely curious about how much it might cost to refinance. You'll have to pay fees to your new lender to compensate them for offering the loan, as well as additional costs for credit checks, appraisals, legal documents, filings and so on.

These closing costs can total thousands of dollars, so it's critical to crunch the numbers and evaluate your options before coming to a decision. Even if the lender advertises the loan as a "no closing costs" loan, you'll still pay the fees. They'll show up elsewhere, often manifesting as a higher interest rate.

3. How Do You Know If It Will Save Money?

As you move forward, you should calculate the "break-even point," which is the time it'll take for the mortgage refinance to pay for itself. You have resources which simplify the calculation, alleviating some of the stress of the process. All you have to do is input your numbers and let the calculator handle the rest.

Once you've determined the break-even point, you'll have a better idea of what a mortgage refinance involves. If you plan to keep your current house for less than the break-even point you've calculated, you should probably stay with the mortgage you have at the moment.

When it comes to refinancing, you have a range of different factors to consider. If interest rates have gone down or your credit score has gone up, a mortgage refinance may prove beneficial. But if you can't justify the closing costs and the break-even point exceeds the time you intend to keep your house, a refinance might harm you.

Ready to Refinance?

If you still feel uncertain about the decision to refinance, you should meet with a qualified professional to discuss the subject. They'll answer any questions you may have about the process, leading you away from mistakes that others in your position have made in the past.

Regardless of whether you choose to refinance your mortgage, feel confident as you continue. You're making the best decision for your unique situation.