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Even if you’ve signed a loan agreement with a 30-year term, it doesn’t mean you’re stuck with it. Comparing refinance options from different lenders could help you save over the life of your loan. But while you might be able to leverage better market rates, your home’s equity or an improved credit score to replace your mortgage with a new one — timing is everything.
Refinancing is when replace your mortgage with a new one with better rates and terms. You can refinance your loan with your current lender or start a new loan with a competing bank or nontraditional lender.
Often the main purpose of refinancing is to save on repayments. But you can also refinance to unlock equity in your property with products like cash-out refinances. A cash-out refinance replaces your existing mortgage with a loan amount that’s higher than what you owe — you’ll get the difference in cash.
If you can lock in a lower rate than what you’re paying now, you stand to save thousands. But because of closing costs and other fees, it’s important to do the math to make sure refinancing is worth it.
Suppose you signed a 30-year $350,000 mortgage with an average variable rate of 4.3% — the ongoing rate at the time — you’d pay $1,732 on your loan monthly.
Now suppose that you’ve found a new lender willing to refinance your existing mortgage at today’s average rate of 3.54%. It’ll cost you 2% closing cost. Although you would need to pay $7,000 in fees, it would drop your monthly payments to $1,571.
| Loan Amount | Interest | Monthly Payment | Total Principal and Interest | |
|---|---|---|---|---|
| Current Mortgage | $350,000 | 4.30% | $1,732 | $623,520 |
| Refinance | $350,000 | 3.54% | $1,571 | $565,560 |
| Refinance Difference | $0 | 0.76% | $161 | $57,960 |
By refinancing, you’d save $161 a month — or around $50,000 ($57,960 – $7,000 = $50,960) over the lifetime of your 30-year loan, after deducting closing costs and fees.
How to calculate your refinance savings
A few things to consider when comparing lenders for your refinance are:
Learn whether refinancing can help save you money, cut down your repayment term or leverage equity in eight steps:
Learn more on how to refinance your mortgage
You’ll provide a lot of the same documentation necessary for your existing mortgage including:
Refinancing a mortgage can be expensive, requiring upfront costs to both your old and new lenders. Still, after factoring in the fees, you may still benefit from the lower rate or longer term offered by your new mortgage.
Ask both lenders about fees that can include:
No-closing-cost refinance: Does it make sense?
Switching can save you money. You also stand to gain more by refinancing your mortgage:
You may be better off sticking with your current mortgage if:
Generally, your ability to deduct taxes won’t change with a refinanced loan. If you’re worried about taxes, speak to your accountant or a tax professional before refinancing.
Taxes become more complicated with specific types of refinancing, like a cash-out refinance. Refinancing can also reduce your total tax deductions, depending on how much it saves you.
No matter how happy you are with your mortgage, you could benefit from lower rates or better terms. Changing market rates, built-up equity and improved credit are all opportunities to refinance for a lower rate or better terms. Once the savings start rolling in, start your search for your next mortgage.
Understand how to get a loan to pay for renovations through refinancing your current mortgage. Know what to look out for and the differences between all of your options including construction loans and line of credit.
