Is it the right time to refinance your mortgage?

January 04, 2022

Refinancing may be a great way to bring down your mortgage payment or to pay it off completely, or you might want to take out a new loan for a big purchase. With interest rates remaining low refinancing is appealing to many right now. However, there are several factors to consider before you begin the process.

 

The Federal Reserve dropped interest rates in response to COVID-19 and those rates have continued to remain low. But before you decide to refinance your home loan it’s a great idea to start by meeting with a mortgage banker.

Your mortgage loan officer can quickly become your number one ally in the refinance process. And if you’re worried about meeting in-person know that many lenders provide the experience virtually. “You can work with your loan officer online, via the bank’s loan portal, email, phone, and even video call, so you get an in-person feeling but keep it virtual,” says Aaron Tyler, (NMLS #130688) Mortgage Loan Officer at U.S. Bank.

 

Why should you refinance?

Before you refinance, consider your goals for refinancing. Do you want to reduce the amount of interest you pay over the loan term? Are you consolidating debts at a lower interest rate? Do you want to reduce your monthly payment? Knowing your goals will help determine the best type of refinance for your situation and decide whether any closing costs are worth it.

 

When to do it

These are some situations where a refinance might make sense for you:

  • You’re in an adjustable-rate mortgage or interest-only loan and you want a more traditional mortgage.
  • Interest rates are considerably lower than what they were when you took out your mortgage
  • You’re going to be in the home long enough to recoup your closing costs
  • You have calculated your potential refinanced mortgage “breakeven point” and it’s lower than your current mortgage’s breakeven point. Here’s how to calculate yours:
    • Take your net closing costs and divide those by your monthly interest savings.
    • Your net closing costs = your total closing costs minus any lender credits. 
    • Your monthly interest savings = current rate minus new rate divided by 12 times your loan amount.

 

When to hold off

If any of the following situations apply, refinancing may not be the best choice at this time:

  • You may be considering refinancing so you can fix up and sell your home. But refinancing usually involves closing costs. If you don’t stay in the home long enough to save more than you spent to refinance, it might not be worth it. However, before deciding against refinancing, check to see if you qualify for refinancing options without closing costs. 
  • If your existing mortgage has a substantial prepayment penalty, refinancing may be a disadvantage. Check the terms of your current loan before deciding to refinance.
  • Refinancing frequently requires an appraisal. If your home isn’t in great shape, you may want to wait until you’ve made repairs. Learn what the Federal Housing Administration (FHA) looks for during an appraisal.

 

Choosing the right refinancing option

When reviewing refinancing options, consider whether you want a shorter term to pay off the loan more quickly or a longer term to lower your payment. Also, consider the closing costs, interest rates and your ultimate goals for refinancing.

There’s also more than one type of refinance. You may want to do a cash-out refinance if you owe less than what the home is worth, or you may want to consolidate debt or borrow against your home equity.

 

Learn more about refinancing, including a few common reasons people refinance.

Related content

Military homeownership: Your guide to resources, financing and more

For today's homebuyers, time and money are everything

How I did it: Bought a home without a 20 percent down payment

How I did it: Built living spaces to support my family

Money Moments: Tips for selling your home

Overcoming high interest rates: Getting your homeownership goals back on track

Should you buy a house that’s still under construction?

Mortgages after retirement: Here’s what to know

10 ways to increase your home’s curb appeal

DIY home projects 101: tips from a first-timer

Is it the right time to refinance your mortgage?

6 questions to ask before buying a new home

5 things to avoid that can devalue your home

What is a home equity line of credit (HELOC) and what can it be used for?

What is a mortgage?

What you need to know about renting

8 steps to take before you buy a home

What is refinancing a mortgage?

Are professional movers worth the cost?

Building a dream home that fits your life

What to know when buying a home with your significant other

Mortgage basics: How does your credit score impact the homebuying experience?

Mortgage basics: 3 key steps in the homebuying process

Mortgage basics: How much house can you afford?

Mortgage basics: Buying or renting – What’s right for you?

Mortgage basics: Prequalification or pre-approval – What do I need?

How you can take advantage of low mortgage rates

Mortgage basics: Finding the right home loan for you

Quiz: How prepared are you to buy a home?

Uncover the cost: Home renovation

Mortgage basics: What is refinancing, and is it right for you?

Tips for realtors to help clients get their homeownership goals back on track

5 ways to maximize your garage sale profits 

Putting home ownership within reach for a diverse workforce

What’s the difference between Fannie Mae and Freddie Mac?

How jumbo loans can help home buyers and your builder business

Simple steps to be ready for a natural disaster

Checklist: financial recovery after a natural disaster

Pros and cons of a personal line credit

3 tips for saving money when moving to a new home

What’s a subordination agreement, and why does it matter?

Checklist: 10 things to look for when touring a home

How to sell and buy a home at the same time

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Home improvements with the best ROI

How we did it: Converted to solar power

PCS moving checklist for military spouses and families

Crypto + Homebuying: Impacts on the real estate market

How I did it: Bought my dream home using equity

House Hacks: How buying an investment property worked as my first home

Managing the impacts of appraisal gaps in a hot housing market

Spring cleaning checklist for your home: 5 budget-boosting tasks

Saving for a down payment: Where should I keep my money?

Your guide to breaking the rental cycle

Checklist: 6 to-dos for after a move

What are conforming loan limits and why are they increasing

Uncover the cost: Building a home

The lowdown on 6 myths about buying a home

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Money Moments: How to finance a home addition

First-time homebuyer’s guide to getting a mortgage

Dear Money Mentor: When should I refinance a mortgage?

Beyond the mortgage: Other costs for homeowners

10 questions to ask when hiring a contractor

What is an escrow account? Do I have one?

These small home improvement projects offer big returns on investment

Should you get a home equity loan or a home equity line of credit?

Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Is a home equity line of credit (HELOC) right for you?

How to use your home equity to finance home improvements

How does a home equity line of credit (HELOC) work?

Home equity: Small ways to improve the value of your home

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

10 uses for a home equity loan

Improving your credit score: Truth and myths revealed

What types of credit scores qualify for a mortgage?

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.