Refinancing Your Mortgage: When, Why, and How to Save Money

From gauging the ideal timing to calculating the potential savings, we’re here to help you break down the essentials of refinancing mortgage rates so you can make an informed decision. Whether you're aiming to save money or improve your cash flow, understanding how refinancing works can help you determine if it’s the right move for your financial future.

Key takeaways

When to consider refinancing

• Rates drop by 1% or more
• Your credit score improves
• You want better terms
• Financial changes need budget adjustments

Making the call

• Calculate your break-even point by dividing total closing costs by monthly savings
• Plan to stay in the home beyond the break-even point for long-term savings

What to watch

• Less than 20% equity may require private mortgage insurance
• Better credit = better rates
• Lower debt-to-income ratio improves loan terms
• Longer terms = lower payments, but higher interest
• Ensure savings outweigh closing costs

Why refinance

• Save money
• Reduce payments
• Improve financial flexibility

How Does Refinancing Work? 

Refinancing a mortgage is essentially replacing your current home loan with a new one that better suits your financial needs. Think of it as upgrading your financial strategy to better match where you are today, not where you were when you first bought your home. 

When refinancing your mortgage, you can adjust:

• The type of loan (fixed-rate or an adjustable-rate mortgage)
• Your interest rate
• The size of your monthly payments
• The duration of the loan

Smart Times to Consider Refinancing Your Mortgage

Thinking about refinancing your mortgage? Here are the moments when it might make the most sense and offer you new opportunities:

Making the Numbers Work: How to Calculate Whether Refinancing Is Right For You

Deciding whether or not to refinance your home requires a little bit of math. Fortunately, it all boils down to a relatively simple equation.

Your break-even point is a simple calculation to determine when you’ll actually start saving money from your refinance. Refinancing is likely a good idea if you are planning to continue living inside the house beyond the break-even point. 

Here’s how to calculate your refinancing break-even point:

            Break-Even Period = Total Refinancing Costs / Monthly Savings

For example, let’s say your refinancing closing cost is $5,000, and you learn refinancing will save you $250 monthly on your mortgage payments. 

Your break-even point would equal $5,000 divided by $250 per month, or 20 months. After 20 months, you would have paid off the closing costs and would begin to see significant savings every year.

Key Financial Factors to Consider

Plenty of factors influence your new loan rate and your monthly payment. Before moving forward with refinancing your mortgage rate, make sure to take a closer look into these elements: 

• Home equity: If you have less than 20% equity on your home, refinancing could require private mortgage insurance—another monthly expense. 
• Your credit score: As we mentioned earlier, your credit score greatly impacts the rate a lender is willing to offer you. Getting your credit score in good shape is an excellent move before talking to a loan officer. 
• Your debt-to-income (DTI) ratio: Your DTI compares your monthly debts to your monthly income, and it’s an important yardstick lenders use to determine how favorable their terms can be for you.
• Your loan terms: Extending your loan term (e.g., refinancing a 15-year mortgage into a new 30-year mortgage) will reduce monthly payments but increase interest paid over the life of the loan. A shorter term, while more expensive monthly, often saves significantly in interest.
• Closing costs: Refinancing is a major transaction that incurs its own closing costs—typically 2-5% of the loan amount. Refinancing might not be worth it if you can’t afford the closing costs. 

From Refinancing to Relaxing: Don’t Worry, Be Warranty

Speaking of smart money moves, here’s one that’s sure to make your wallet smile: purchasing a new home warranty from American Home Shield.

Just as refinancing helps manage your mortgage costs, a home warranty helps manage unexpected repair and replacement costs for your home’s covered systems and appliances. So the next time your water heater decides to take an early retirement or your AC needs an unexpected upgrade, you’ll be glad you planned ahead. 

AHS assumes no responsibility, and specifically disclaims all liability, for your use of any and all information contained herein.