When Should You Refinance Your Mortgage?

Refinancing can reduce the amount you pay on a mortgage.
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Refinancing your mortgage isn't always in your best interest. In some cases you can actually end up paying more for your refinanced mortgage than you were paying before. If you plan to sell the home soon, you might not even recoup the closing costs that come with the refinancing. Consider whether the time is right before you sign on the dotted line for a mortgage refinance.

Interest Rates

Refinancing allows you to secure a lower interest rate or change the type of interest rate that's attached to your mortgage. Make sure that the change is worth the closing costs of the new mortgage, though. Refinance if you can lower the interest rate of your fixed-rate mortgage by 1 percentage point or more, or if you have a chance to lock in a low rate by changing from a variable-rate mortgage to one with a fixed rate.

Monthly Payments

Mortgage refinancing is often used to lower monthly mortgage payments, spreading out the remaining balance over a longer period so that you don't have to pay as much each month. Make sure that the new payments will be low enough to make it worth refinancing, though. If you'll only receive a small reduction in your monthly payment, you will probably be better off keeping your current mortgage so that you can pay it off sooner.


Equity is considered by many to be the portion of your mortgaged home that you actually "own," as it's the value of the investment you have made into your home so far. The more equity you have, the better the deal you receive on your refinancing will be. If you have at least 20 percent equity in your home, you should be able to get a loan that doesn’t require you to buy private mortgage insurance, which will help cut monthly payments. Consider how much equity you've built in your home when trying to decide whether to refinance; if you don't have at least 20 percent equity, wait and build more equity first.

Debt Consolidation

One common use of refinancing is to pay off other debts by borrowing more money on the refinance loan than is actually owed on the mortgage. Before refinancing as a debt consolidation tactic, figure out whether you'll save money with the new loan. Ideally your new mortgage payment should be less than what you were paying previously for your mortgage and the bills you consolidated with your new loan.

Credit Score

Check your credit score before deciding whether to refinance your mortgage. If your credit has improved since the time you took out your original mortgage, you will be much more likely to secure a lower interest rate. Without good credit, you won't be able to snag one of the low rates that are advertised, and in some cases you could actually end up with a higher interest rate than you had before.

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