When Is It Worth It to Refinance?
“How long do I have to wait to refinance my mortgage loan?” is one of the most asked questions I get from homeowners. The answer varies depending on personal financial goals, market conditions, and the terms of your current mortgage.
When Is the Right Time to Refinance?
A general rule of thumb is to wait at least 12 months from your original loan date before considering refinancing. This time frame allows you to build some equity and ensures you’ve made a few payments to stabilize your financial profile.
However, if mortgage rates drop significantly soon after you close on your loan or your credit score has drastically improved, it might be worthwhile to refinance early.
The best way to determine if now is the right time to refinance is by calculating your break-even point. You can do this by dividing your total closing costs by your expected monthly savings. For example, if your closing costs are $5,000 and you expect to save $250 per month, your break-even point is around 20 months. If you plan to stay in your home longer than that, refinancing could be a smart move.
How Far Does Your Interest Rate Have to Fall?
Historically, it was recommended that refinancing your home mortgage is a good idea if your interest rate can be reduced by at least 2%. Today, I believe 1% savings is enough of an incentive to refinance.
A 1% decrease may not sound like much, but on a larger loan amount, it can translate into substantial monthly and long-term savings. For example, if you have a $300,000 mortgage with a 5% interest rate, reducing it to 4% can save you over $170 per month and more than $60,000 over the life of a 30-year loan.
That being said, the ideal rate drop can depend on your loan balance and your future plans. If your mortgage is relatively small, you might need a bigger rate drop to make refinancing worth the upfront costs. Conversely, on a larger mortgage, even a 0.5% drop can generate significant savings.
Consider Your Financial Goals
Beyond just the interest rate, think about your overall financial picture. Do you want to shorten your loan term? Refinancing from a 30-year to a 15-year mortgage can save you thousands in interest payments, even if your new monthly payment is higher. Or, if you want to lower your monthly payments to free up cash for other expenses, refinancing to a longer term might be a better fit, as long as the interest rate is lower.
Every situation is unique. If you’re unsure whether refinancing makes sense for you, reach out to me today for a personalized assessment based on your current loan and long-term plans.
Best,
Ken Venick, CDLP, CMPS
Senior Mortgage Banker | NMLS #138175
410.598.9410