The best time to refinance a mortgage depends on several factors including interest rates, your credit score, how long you plan to stay in the home, and the costs of refinancing compared to your potential savings.
Key Times to Refinance
- When mortgage interest rates drop significantly compared to your current rate, especially by about 1% or more. Lower rates can reduce your monthly payments and the total interest paid over the loan life.
- When your credit score has improved, you may qualify for better rates, even if market rates have not dropped.
- When you plan to stay in the home long enough to recoup the refinancing closing costs with your monthly savings. Generally, if the breakeven point (closing costs divided by monthly savings) is within a few years, refinancing makes sense.
- When you want to change your loan term to pay off the mortgage faster or to lower monthly payments.
- When your loan structure no longer fits your needs or your home equity has increased enough to qualify for better terms.
Additional Considerations
- Refinancing can be worth considering if you can lower your interest rate by at least 1%, although some advise a 2% drop as a stronger trigger.
- Frequent refinancing is possible but often subject to lender restrictions or costs, so it’s usually reviewed every 2-3 years.
- Avoid refinancing if it requires expensive discount points or other fees that offset your savings.
In summary, refinance when rates drop meaningfully below your current rate, when your credit improves, and when you plan to stay long enough to save more than the refinancing costs. Use a refinance calculator to crunch the numbers and ensure a positive financial return.
