Is now a good time to refinance? How to tell

Timing is the wrong question to start with. The right question is whether a new loan saves you more than it costs over the time you will actually keep it. The answer depends on your current loan, your plans and today’s pricing, and not on whether rates moved last week. Here is how to work it out.

What a refinance is

A refinance pays off your current mortgage with a new one. The common types are:

• Rate-and-term: change the rate, the term, or both.
• Cash-out: borrow more than you owe and take the difference in cash. See cash-out basics.
• Streamline: a simpler refinance for FHA, VA and USDA loans, with less paperwork and often no appraisal.

Step 1: do the break-even math

Every refinance has costs: lender fees, title, recording, and sometimes an appraisal and points. The break-even point is how long it takes your monthly savings to pay those costs back.

Break-even months = total refinance costs ÷ monthly savings

Here is a hypothetical example:

If you keep the new loan past the break-even month, the refinance has paid for itself. If you sell or refinance again before then, it has not. The break-even calculator runs this with your numbers, and the break-even lesson explains it in more depth.

Step 2: look past the monthly payment

A lower payment does not always mean a less expensive loan. Watch for these issues:

• The new term. If you are 6 years into a 30-year loan and refinance into a new 30-year loan, the longest the new loan can run is 6 years past your current payoff date. That is a limit, not a schedule. Keep paying what you pay today, and the difference goes to principal: at the lower rate, the loan can be paid off on or before your current payoff date. If you pay only the new, lower payment, you can pay more interest overall. A shorter term does the same as paying extra, with a higher required payment.
• Costs added to the loan. Financing closing costs preserves your cash but raises your balance.
• Points. Paying points can make the rate look attractive while pushing the break-even out by years.

Compare total cost over the years you expect to keep the loan, rather than only the payment.

Reasons to refinance beyond rate

Rate is the usual reason, but not the only one:

• Remove mortgage insurance. If your home’s value has risen, a refinance from FHA to conventional can remove monthly MIP. FHA MIP stays for the life of the loan if you put down less than 10%. On a conventional loan, you can also ask your servicer to remove PMI once you reach 80% of the original value, without refinancing.
• Shorten the term. Moving to a 15- or 20-year loan raises the payment but can cut total interest sharply.
• Replace an adjustable rate. A fixed rate trades possible savings for certainty.
• Remove a borrower. This is common after a divorce or when a co-signer wants to be removed from the loan.
• Pay off higher-cost debt or fund work on the home. A cash-out refinance can do this, but you are turning short-term debt into 30-year debt secured by your home. It is best done with a clear plan.

Streamline options

If you have an FHA, VA or USDA loan, a streamline refinance may be the easiest way to lower your rate. See the streamlines lesson. Veterans with an FHA or conventional loan can also refinance into a VA loan: it removes monthly mortgage insurance, and VA rates are typically lower than conventional rates.

USDA also offers streamlined refinances for existing USDA loans. Rules differ by option, so ask us which fits your loan.

What about waiting?

Rates move every day with the market, in both directions, and no one can predict them reliably. That includes us. Waiting for a better rate is a bet. Running the numbers on today’s pricing is a decision.

If a refinance works on today’s numbers and your plans, it works. If it does not, the answer is no for now, and we can run the numbers again whenever your situation changes. Each refinance brings new costs, so a refinance that barely clears break-even leaves little room for another one later. We will tell you what is moving the market. We will not tell you where it is going.

What to have ready

• Your current mortgage statement
• Recent pay stubs and W-2s, or tax returns if self-employed
• Recent bank statements
• Homeowners insurance details

Streamlines often require less. We will tell you exactly what your file needs.

---

Sources: VA: Interest Rate Reduction Refinance Loan. VA: Funding fee and closing costs. HUD Single Family Housing Policy Handbook 4000.1. CFPB: When can I remove private mortgage insurance from my loan?.