The best time to refinance a home is typically when you can lower your interest rate significantly , usually by about 1% to 2%, and you plan to stay in the home long enough to recoup the refinance costs, which often takes about two or more years. Refinancing makes sense when it results in lower monthly payments or total interest paid, or when your financial situation has improved (such as a better credit score) enabling you to qualify for better terms. Other reasons to refinance include switching from an adjustable-rate to a fixed-rate mortgage, accessing home equity through cash-out refinancing, or adjusting the loan term to pay off the home faster. It is important to calculate the break-even point—the time needed to recover closing costs through savings—to ensure refinancing is beneficial.
Key Situations to Refinance
- Interest rates have dropped below your current rate by at least 1-2%
- You want to switch from an adjustable to a fixed-rate mortgage
- You have built up equity in your home and want to access cash or get better terms
- Your credit score has improved, qualifying you for a lower rate
- You want to shorten or extend your loan term to suit your financial goals
- You are nearing the end of a fixed-rate period and want to avoid a rate increase
Important Considerations
- Calculate monthly savings and compare them against refinancing closing costs
- Plan to stay in the home past the break-even point to realize financial benefits
- Consider the impact on your credit score and any "seasoning" period required
- Shop around for the best refinance rates and terms
In summary, refinance when it lowers your interest rate enough to save money over time after costs, suits your financial situation, and fits your future housing plans.