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Generally speaking, one or more of the following conditions needs to be present before you should consider refinancing your mortgage:
- Mortgage interest rates are falling.
- Your home has significantly appreciated in market value.
- You've been making payments on your original 30-year mortgage for less than 10 years.
Falling mortgage interest rates
In a falling mortgage interest rate environment, refinancing can offer homeowners two potential benefits, both of which have the potential to help reduce your total borrowing costs over time:- Lower your monthly payment while maintaining the same or similar repayment term as your original mortgage.
- Shorten your repayment term while maintaining the same or similar payments to your original mortgage.
Rising home prices
In areas of the country where home prices have experienced dramatic increases in market value, refinancing can help you take advantage of your increased equity in your home. For example, a cash-out refinancing may make sense if your house has increased in value and you have a high level of consumer debt that you would like to pay off. 1
The early years of your mortgage
Refinancing usually makes the most sense in the early years of your mortgage, when payments are primarily going toward interest. In the later years of your mortgage — as you begin to pay more principal than interest — you may be better off keeping your original loan. Remember, refinancing will give you a brand new mortgage to pay off and will take you back to the beginning of the cycle in which you are paying mostly interest.
Refinance or get a home equity loan?
As a rule of thumb, if you've been making payments for less than 10 years on a 30-year loan and mortgage interest rates have dropped, it may be beneficial to consider refinancing. If you are more than 10 years into your loan, a home equity loan may be a better choice for paying down debts or converting your home equity to cash.
1. The amount you save on loan consolidation may vary by loan. Since a home loan may have a longer term than some of the bills you may be consolidating, you may not realize savings over the entire term of your new loan. In addition, your loan may require you to incur premiums for hazard and, if applicable, flood insurance and mortgage insurance which would affect your monthly payment reduction. Federally Guaranteed Student Loans should not be consolidated because you will lose important federal benefits.
