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When Should You Refinance?

Is this the right time to refinance? It may be if you consider all the reasons to do it.

There are several reasons to refinance your home mortgage, and knowing when is the right time depends on your particular situation. Refinancing your home mortgage allows you to obtain a new loan to pay off your existing one. Both loans are secured by the same property.

Lower Your Monthly Payments

The most common reason homeowners refinance their mortgage is to lower their monthly payment. If interest rates drop low enough below your current rate, you could save money both on your payments as well as on the overall amount of interest you pay over the life of the loan. Before you make the decision to refinance, it's important to figure out how much it will cost you, and whether you will be staying in the house long enough to recuperate these charges.

To calculate if the lower monthly payments you will get by refinancing will be worth it for you in the long run, use the following calculation:

Take the total cost to refinance (your lender can provide an estimate) and divide it by the monthly savings (your current monthly payment minus your proposed new one). This gives you the "breakeven point", or the number of months you will need to stay in your house to recover the costs you paid to refinance.

For example:

Total cost:



Current monthly payment:



New monthly payment:



Breakeven point = $2,400 / ( $1,500 - $1,300 ) = 12 months

The example above shows that you would have to stay in your house for at least a year to break even and start enjoying your savings. In other words, if you were planning on keeping your existing house for at least a year, it would be worth refinancing. Otherwise, you would need to wait for interest rates to drop further. You may want to try our calculators to see how refinancing will affect your situation.

Why Else Would You Refinance?

Lowering your monthly payment is only one reason to refinance. There are others that might make sense for you.

Change the Term of Your Loan

If you feel you can afford a higher monthly payment, you may consider refinancing to decrease the term of the loan. A shorter-term loan can help you build equity in your home quicker and save you a significant amount of money over the life of the loan.

For example:

On a $100,000 mortgage -

30-Year Loan

15-Year Loan

Interest Rate



Monthly Payment*



Total Interest Paid Month 180



Amount Still Owed Month 180



* Includes principal and interest only (does not include taxes and insurance)

Although your payment is higher each month, if you can afford it, it's worth it. You will pay a lot less in interest and will build equity much faster. You can use the CareOne Credit calculator to compare the difference.

Switch Loan Types

If your current loan is an adjustable rate mortgage (ARM) and your rate is about to adjust to a higher one, or you are just tired of the uncertainty of an ARM, it may be time to refinance to a fixed rate loan. Your monthly payment may increase, but if interest rates are on the rise, your ARM loan could end up climbing to a higher payment in the long run. For a summary of reasons to refinance, see the American Institute of Certified Public Accountants articles Refinancing Your Mortgage and Should I refinance my home mortgage?

Tap the Equity on Your Home

You build equity in your home by paying down the principal on your loan or having the value of your house increase from the time you bought it. If you have enough equity in your home, you may be able to refinance to get extra cash out. You may want to do this if you need money to consolidate debts, pay for your children's college, perform home improvements or make other large purchases. Depending on the interest rate you can get, it may reduce you overall monthly payments if you use the money to pay off other debts.

Keep in mind that there is another option to consider if you want to borrow money against the equity in your home. Home equity loans may allow you to borrow just as much money, but may cost you less to do it. For more information on home equity loans, you may want to read the related articles in our Knowledge Center Library.

Take control of your finances with our debt help tools. Use our calculators and budget planner to help you manage your money.

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