How to Refinance Your Mortgage

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How to Refinance Your Mortgage When you refinance your mortgage, you’re simply replacing your current mortgage with a new one. Sounds simple enough — but the refinancing process can be every bit as challenging as when you first bought your home.

The main reasons homeowners refinance are usually to get a better interest rate — which can lower your monthly payments and save you thousands of dollars in interest over the course of a loan — or to switch from an adjustable-rate mortgage into a fixed-rate loan. While it’s true that refinancing might save you money in both the short and long term, refinancing your mortgage does take some time, money, and effort, and you need to run the numbers to make sure you’ll actually realize the savings so many lenders promise.

There’s a bit more to refinancing than simply locking in a lower interest rate on your mortgage. Just like when you first bought your home, you’ll owe closing costs and other fees, such as a bank appraisal — so it’s important to factor in these additional costs to understand if refinancing is really worth it.

However, to get a ballpark idea of how much you could save, below is a current rate table with today’s best mortgage rates. Use this tool to compare your existing rate with current market rates. Generally speaking, if you can shave off a full percentage point of interest — refinancing a 4.75% mortgage down to a 3.75% rate, for example — it’s going to be worth the closing costs and effort. However, farther down we’ll explain in more detail how to determine when it makes sense to refinance your home.

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Why Should I Refinance My Mortgage?

You probably remember all the hoops you had to jump through to get your original mortgage — why would you want to do that again if you aren’t even moving? There are several good reasons, all of which could leave some more cash in your pocket: To get a lower interest rate: This is the most popular (and most obvious) reason to refinance your mortgage. Rates remain near historic lows, and obtaining a new loan with an APR just a percentage point or two lower than your old one can mean substantial savings, both monthly and over the long haul. And if your credit has improved substantially since you took out your original mortgage, that could also help you qualify for a much better rate than what you currently have.

To change your loan term: This typically goes hand in hand with rate refinancing. Changing your loan term (the length of time it will take you to pay off your loan) can affect both your monthly payment and how much you pay over the life of your mortgage. A longer term means you’ll have a lower monthly payment, but will probably pay more interest over the life of the loan. A shorter term typically means a higher monthly payment with less interest owed over the life of the loan. Note that if you score a particularly great rate, you might be able to shorten your loan term without raising your monthly payment.

Likewise, you could potentially extend your loan term without adding to the total interest owed.

To change your loan type: Perhaps your current mortgage is a 5/1 ARM, or adjustable-rate mortgage. You had a low fixed rate for five years, but now you’re nervous your interest rate is going to rise in the coming years and would rather switch to the security of a conventional fixed-rate loan that you can more easily budget for.

To get some cash: “Cash-out” refinancing lets you get a mortgage loan for more than what you actually owe and keep the difference to spend on whatever you want. This is a common alternative to a home equity loan or home equity line of credit for homeowners who want to convert some of their home’s equity into cash.

When Does It Make Sense to Refinance My Mortgage?

An old refinancing rule of thumb says it makes sense to refinance when you’ll be able to get an interest rate that’s at least 1% to 2% lower than the one you’re currently paying. But many experts caution that this rule, though appealingly simple, discounts too many extenuating factors.

For instance, what closing costs and fees are attached to your loan, and how long will it take you to break even? How long do you plan to stay in your home? Are there any tax implications, such as a lower mortgage interest deduction? Here are the big questions you need to ask yourself before refinancing your home.