When Does Refinancing Make Sense?

Refinance When You Can Improve Your Mortgage Situation

When does refinancing make sense? Many view the answer to this question only in terms of mortgage rates. The usual idea is that when rates go lower, it's time to refinance.

However, the availability of lower mortgage rates should not automatically trigger a refinance application.

Click to see today's rates (May 30th, 2017)

Refinancing: When You Should Consider It

In addition, there are other opportunities which also suggest that a new mortgage might be appropriate.In basic terms, there are five situations when refinancing should be considered:

Rule 1: Monthly Payment Reduction

If your goal is to free up cash for other things, or if your current mortgage is difficult to afford, you might want to refinance for a lower mortgage payment.

You can achieve this by choosing a refinance with a lower interest rate, a longer term, or both. In fact, you can reduce your payment by refinancing the remaining balance of your loan over a new term at the same rate, because you're extending your repayment period.

Extending the total time it takes to repay your mortgage may get you a lower payment, but it may also increase your total costs over the life of the loan.

That's not necessarily bad, but you should be aware of it.

Rule 2: Cost Savings

Unless your current payment is unaffordable, refinancing just to lower your payment is not usually a great idea. It can cost you a lot more in the long run, because you'll be extending the total time it takes to become mortgage-free.

To see if you're really saving money with a refinance, see what your new payment would be if you did not extend your repayment. If your current 30-year loan is five years old, what would your payment be with a 25-year term?

Take the difference between that payment and your current payment to see if you're saving money. If it costs you $5,000 to refinance, and the monthly payment difference over 25 years is just $25, it would take 200 months before you break even and start saving money.

That's something to keep in mind when determining if refinancing make sense.