The answer to “Should I refinance my mortgage?” also depends on the details of the new loan. Before you redo your mortgage, make sure it’s a good move financially by answering these four questions:
- Can you offset refinancing costs? Shop around for the best offer, and then compare it to the terms of your existing loan. The monthly savings should offset the cost of refinancing within two or three years. If it takes longer than that to break even, or if you don’t plan to stay in your house for that long, refinancing might not make sense.
- Can you reduce your monthly payment? Make sure you understand what’s behind a smaller payment—a lower interest rate, a longer term on the loan or a combination of the two. Lengthening your loan term, for example, can reduce your monthly payment, but it increases the total amount you pay in interest.
- Can you drop private mortgage insurance (PMI)? If you didn’t make a down payment of at least 20% when you purchased your home, you’re probably paying PMI. But if refinancing increases your equity to at least 20% of the value of the home, you can stop paying PMI.
- Has your credit score changed? If your credit score has taken a hit since you took out your original home loan, you’ll probably pay higher interest rates when you refinance. But if your score has improved, you may get a lower rate.