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Refinancing a mortgage is a great way to lower your monthly payments and spend less money on interest throughout the life of your loan. And if we look at the numbers, it’s clear a large number of borrowers recognize that. 

Mortgage refinance applications rose 1% for the week ending Dec. 11 compared to the previous week, according to the Mortgage Bankers Association. And all told, refinance requests are coming in at more than double the rate they did a year ago.

Given that refinance rates have dropped to historically low levels, that surge is understandable. Still, not everyone has gotten in on the action. In fact, mortgage data provider Black Knight estimates that more than 19 million mortgage holders could save $300 or more per month by refinancing.

If you’re among them, you may be thinking of a refinance. But is that the right move for you?

Questions to ask yourself before you refinance

While there are potential savings to be reaped by refinancing, it’s not the best move for everyone. To see if it’s right for you, ask yourself these questions.

What does my credit score look like? 

You’ll need strong credit to qualify for today’s top refinance rates, and if your credit is poor, applying may not be worthwhile. Instead, spend a few months boosting your credit — by paying incoming bills on time, eliminating some debt, and correcting errors on your credit reports. There’s a good chance mortgage rates, refinance rates included, will stay low for quite some time, so don’t assume you’ll miss out if you don’t act immediately. 

How much would refinancing lower my rate? 

If you recently closed on a house or refinanced and snagged a great mortgage rate, then refinancing today may not save you all that much when you factor in the closing costs to finalize that loan. As a general rule, refinancing makes sense when it lowers your mortgage interest rate by close to a full percentage point. If you can only shave, say, a quarter of a percentage point off your loan, it’s probably not worth the closing fees.

How long do I plan to stay in my home? 

Again, you pay closing costs to complete a mortgage refinance, so calculate your break-even point to see if refinancing is worth it. If you don’t plan to stay in your home for more than another year (if, say, you bought a starter home you’re rapidly outgrowing), refinancing may not make sense. For example, you might pay $6,000 in closing costs to lower your monthly payments by $300. This means you need 20 months to break even and see savings. If you think you might move in a year, refinancing could lose you money. 

While today’s low interest rates make refinancing an appealing option for many borrowers, it’s not necessarily the best move for you. Consider the above questions carefully when weighing your options.



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