When to Refinance a Mortgage

Highlights

When a refinance makes sense
Biggest reasons to refinance
How to get the timing right

Show more Show less

If you have at least 20% equity in your home, you may qualify to refinance your mortgage. Although you’ll need to break your existing mortgage and potentially pay prepayment fees, refinancing offers a few potential benefits. You could lower your overall costs, consolidate debt, or get access to money for home renovations or other big expenses.

Before you start browsing for different mortgage options and comparing mortgage refinance rates, it’s worthwhile to learn more about the mortgage refinancing process. Understanding what goes into a refinance will help you decide if it’s worth it for your unique situation, and when is the best time to refinance.

When a refinance makes sense

As a rule of thumb, refinancing your mortgage could be a good idea if you meet all the eligibility conditions and the process will save you money.

Since refinancing is similar to getting a new mortgage, you will need to:

Have sufficient home equity (20% is usually the minimum).
Have a credit score in good standing.
Have a stable income.
Fall under the debt service ratio thresholds.
Pass the mortgage stress test and demonstrate that you can afford the current qualifying rate.
Have a loan-to-value (LTV) ratio of less than 80%.

Since the potential savings are one of the most appealing aspects of refinancing, it typically only makes sense to refinance when interest rates have dropped since you took out your current mortgage. However, since you’ll incur fees and prepayment penalties when you break your current mortgage and refinance, you need to make sure the process will actually save you money in the long run.

Even if interest rates haven’t dropped significantly, it can make sense to refinance if you’re looking to consolidate any outstanding high-interest debt, such as credit card balances or a personal loan. When you refinance your mortgage, you can borrow more money and use those funds to pay off your high-interest debt. You’ll still owe the same amount of money, but it will all be part of your mortgage with a lower interest rate.

Biggest reasons to refinance

While your motivation for refinancing will depend on your personal financial situation, here are some of the most common reasons to refinance a mortgage.

Lower your rate

Homeowners with a fixed interest rate mortgage may find themselves in a dilemma when interest rates start to fall, feeling frustrated that they’re locked into a higher rate while people getting a new mortgage have access to lower rates. Refinancing offers a path to take advantage of those lower rates. It comes with costs, but the savings can often be worth it. To find out how much you could save by refinancing, you can use an online calculator, or you could ask a lender or mortgage broker.

Turn equity into cash

Another reason people may consider refinancing their mortgage is to make the most of the equity they’ve built, especially if they have limited savings or cash flow. Tapping into that equity by refinancing can free up cash to pay for home renovations, a vacation, education expenses or a down payment gift for their children.

Change your loan term

You can also choose to refinance your mortgage for better loan terms, such as increased prepayment options or a different term length.

How to decide if now is a good time to refinance your mortgage

Having a reason to refinance is important, but it’s also worthwhile to consider the timing and the factors that could affect your decision to move forward. Some things to think about before refinancing your mortgage include:

Costs

Refinancing comes with upfront costs that you may need to pay, such as:

Legal fees (lawyers, title search, title insurance, etc).
Prepayment penalties.
Discharge fees.

Creditworthiness

Since a mortgage refinance is a new loan, lenders will check your credit score and history before approving your application. The higher your credit score, the more likely you’ll be approved. That said, every lender has different criteria when approving loans, and your credit score is just one factor; the minimum required credit score may vary by lender.

Will refinancing save you money or help you achieve a financial goal?

Many people would argue that the right timing for mortgage refinancing depends on whether you’ll save money or achieve a financial goal. If refinancing only saves you a few hundred dollars, it’s probably not worth it. However, if you save tens of thousands of dollars over the life of your mortgage, then going through the process is likely worth the time.

As for financial goals, mortgage refinancing allows you to free up cash to consolidate debt, renovate your home, cover education costs for your children or pay for other significant expenses. Depending on your goals, refinancing your mortgage could be a good way to achieve them.

If you meet the refinancing conditions and have crunched the numbers to confirm it could help you save money or reach a financial goal, refinancing your mortgage now could be beneficial. Make sure you fully understand the costs of breaking your current mortgage and finalizing a new one.

Refinancing your mortgage is worth it if it will save you money over the life of your mortgage, or when it helps you achieve a financial goal that’s important to you. The most common time when refinancing is beneficial is when interest rates have dropped, and you can save money by getting a new loan. Tapping into your home equity to consolidate debt or pay for major expenses also can be beneficial.