With interest rates still at historic lows at the beginning of 2022 but beginning to rise since then, many homeowners are trying to decide whether it's worth it to refinance their mortgage. There are plenty of financial and situational calculations to consider when deciding whether to refinance. Your home is one of the most important assets you have, so it makes sense that you would want to maximize it to the best of your ability.
In this post, we'll take a look at when it makes sense to refinance and look at some situations where it might make sense to hold off.
How Much Does It Cost to Refinance?
When you refinance your house, that means you're replacing the mortgage you currently have with a new one that has new terms. In short, you apply for a new mortgage and use the money from that loan to pay off your old one. But it's not going to be free.
If you're thinking about refinancing, refinance fees should be part of your calculations to determine if it makes sense. The cost to refinance a mortgage will depend on a variety of different factors, including your home's location, value, and the lender that you choose. The average cost to refinance your home, including all typical refinance fees, could be anywhere between $2,500-$5,000. You can avoid some refinance fees, so you'll want to make sure to shop around and talk with different lenders to make sure you're getting the best deal possible.
One thing that you'll want to be aware of is the lender who advertises a “no fee mortgage refinance.” There generally is no such thing as a refinance that is completely without fees. “No closing cost refinance,” “no fee mortgage refinance,” and “no point/no fee refinance” are three terms that generally mean that the mortgage refinancing fees are rolled into your new loan. It's important to realize that you are still paying those fees, even if they are amortized over 20-30 years.
Another option you might consider is a no-cost mortgage. A no-cost mortgage differs from a no-cash mortgage (where the closing costs are added to the loan), because with a no-cost mortgage, the lender truly pays all upfront costs. The lender will make their money usually by charging a higher interest rate than in a mortgage where you have to pay upfront fees and costs. That lets them recoup their costs over the length of the loan. No-cost mortgages may also have a prepayment penalty if you refinance in the first few years of the loan. Still, despite the potentially higher interest rates, a no-cost mortgage can make sense if the rate is lower than your current rate.
How to Calculate If Refinancing Is Worth It
The basic calculation that you'll want to use to determine if refinancing is worth it is to calculate the total upfront refinancing fees that you'll pay. These fees could include a refinance origination fee, title fees for refinance, or title settlement fees. These upfront refinance fees could represent the total cost of your refinance and could be paid out of your pocket at closing or potentially rolled into the starting balance of your new loan.
Once you have an idea of the upfront refinance fees, you'll want to look at how much money you will save each month with your new mortgage. If you divide your total upfront costs by the amount you'll save each month, that will calculate your payback period. The payback period is how long it will take before your monthly savings will pay back the upfront costs you paid to refinance.
As an example, let's say it will cost $3,500 in upfront fees to refinance. Whether the $3,500 is paid by you at closing or rolled into the balance of your new loan, it still represents money that you have to pay. If you will save $100 with the new monthly payment on your refinanced mortgage, then you can calculate your payback period by dividing $3,500 by $100. In this case, your payback period is 35 months or nearly three years. You'll need to stay in your home for 35 months before the refinance starts actually being worth it.
When Should I Refinance My Mortgage?
A common rule of thumb is that it can be worth it to refinance for 1%—if you can drop your interest rate by at least 1%, it might make sense to refinance. You can also look at the payback period. If you will pay back your upfront refinancing costs in less than 2-3 years, that can be a good indicator that refinancing your mortgage will make sense for your specific situation.
Another instance is if you're looking at lowering the term of your mortgage. This can be an attractive option if interest rates have dropped significantly since you first took out your mortgage. You might have gotten a 30-year mortgage when you first bought your house, but with rates dropping, you can get a similar or even lower monthly payment with a 15-year or 20-year mortgage. That can save you hundreds of thousands of dollars in interest payments over the course of your loan.
One thing you'll want to keep in mind when you're refinancing is the length of your new mortgage. If you're two years into payments on a 30-year mortgage, then you only have 28 years left before your mortgage is paid off. But if you refinance to another 30-year mortgage, you are also resetting the clock on how long it will be until your mortgage is paid off. That will also likely lead to your paying more interest. You might consider still making payments on your new loan as though it is still a 28-year mortgage so you can get out of debt at the same time as before.
If you are wondering how many times you can refinance your home or how often you can refinance a home, there is no set limit. You can refinance your home as many times or as often as you like. Just remember that there is an upfront cost to refinancing your home. Each time you refinance your loan, you’ll need to pay closing costs, and those can easily total thousands of dollars with each refinance. So, refinancing every month, or even every year, can get very expensive.
Is It Worth It to Refinance a Doctor Mortgage Loan?
Most mortgages, including doctor mortgages, have no early repayment penalty, and that means you can refinance them at any time. With a physician mortgage, it can make sense to refinance into a lower rate conventional mortgage after a few years because generally:
- Your income goes up
- Your debt-to-income ratio goes down
- Your credit score goes up
- Your mortgage has been paid down (increasing loan-to-value to more than 20%), and
- Your home has appreciated (increasing loan-to-value to more than 20%).
So even if interest rates have not fallen, it can often make sense to refinance a physician loan. If interest rates go down, that is an added bonus. Doctor mortgages are generally only for a home you are buying, so you typically do not nor cannot refinance from one physician loan to another, but every program is different and is almost constantly changing.
Have more questions about physician mortgages and what would be the best option for you? Look at the WCI-vetted list to help you sort it out.
When to Avoid Refinancing Your Mortgage
Here are a couple of instances where it might not be worth it to refinance your mortgage and where you should consider keeping your current loan:
- If interest rates haven't changed much since you got your original mortgage
- When you're not sure how long you will stay in your home
- If the payback period is too long
- If your credit isn't great—borrowers with lower credit scores will pay higher interest rates.
If you are looking at low interest rates and wondering if you should refinance your mortgage, the best thing to do is sit down and calculate the costs. If you are handy with a spreadsheet, it shouldn't be difficult to look at the upfront costs and determine your own payback period. There are also many online refinance calculators where you can plug in your own information to see how much refinancing will likely save you each month. You can then use that information to get an idea of how seriously you should consider refinancing your home.
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