The best time to refinance is when you can lower your interest rate enough to generate meaningful savings after covering the refinancing costs, usually when current mortgage rates are below your existing rate. Typically, a drop of about 1% or more in interest rate can make refinancing worthwhile, especially if you plan to stay in your home long enough to surpass the break-even point where savings exceed closing costs. Other good reasons include wanting to switch loan types, reduce monthly payments, access home equity, or improve loan terms. However, refinancing is not advisable if you recently bought your home, can't lower your rate, or won't remain in the home long enough to justify the costs. Key factors to consider when deciding to refinance:
- Lower interest rates that reduce your monthly payments and total interest paid over the loan life.
- Your current loan balance and remaining term.
- Closing costs of refinancing and the break-even point for recouping these costs.
- How long you plan to stay in the home.
- Your credit score improvements that might secure better rates.
- Specific financial goals like debt consolidation or changing from adjustable to fixed-rate mortgage.
For example, refinancing a 30-year mortgage after five years from 6.23% to 5.82% interest could save hundreds monthly and tens of thousands in interest, but only if you stay beyond the break-even period considering closing costs.
Hence, the right time to refinance is when the financial benefits outweigh the costs and align with your long-term housing plans.
