Should you refinance your mortgage if you can keep the same interest rate but lower your monthly payment?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

In addition to your mortgage rate and monthly payment, there are several factors that go into determining if it makes sense to refinance your mortgage including your current and new mortgage balance, how far you are into your current loan, the length of your new loan and your mortgage program.

As a rule of thumb, when you refinance, your new lower mortgage payment should allow you to recover your closing costs, or breakeven, within 30 months of closing. For example, if your closing costs are $5,000 then your new mortgage payment should be at least $167 less than your current mortgage payment so you can recover your the costs within 30 months ($5,000 (closing costs) / $167 (monthly payment savings) = 30 months to breakeven).

Use ourMortgage Refinance Calculatorto determine your monthly payment savings and how long it takes to breakeven when you refinance

So if you can lower your mortgage payment enough, it may make sense to refinance even though your interest rate remains the same.  This scenario typically applies when your new mortgage amount is less than your original mortgage, so your monthly payment is lower. 

If your primary goal is to reduce your mortgage payment then refinancing makes sense but there are other factors you should keep in mind when you evaluate your financing alternatives. Another important consideration is how far you are into paying down your current mortgage and the length of your new loan.

For example, if you are ten years into a 30 year mortgage and you refinance into a new 30 year loan you have effectively extended your original mortgage into a 40 year loan.  Paying interest for an extra ten years can cost you tens or even hundreds of thousands of dollars more in interest, depending on your loan amount and mortgage rate.

So even if your new loan has a lower monthly payment you usually pay more in total interest expense over the long run by refinancing a 30 year mortgage with another 30 year loan. This is not always a bad thing if your priority is to lower your monthly payment but total interest cost is important to consider as well.  After all, you do not just want to give your money to the bank.

This is why we recommend that the length of your new mortgage matches the remaining length of your current loan, if possible.  For example, if you are ten years into your current mortgage, refinance into a new 20 year loan instead of a 30 year loan.

The mortgage rate for a shorter loan is lower than for longer loan, which reduces your interest expense. Shorter term mortgages usually require a higher monthly payment because you repay the loan over a shorter period of time but you can offset this potential payment increase by refinancing with a lower mortgage balance.  In some cases you may be able to both lower your mortgage payment and your total interest cost by refinancing.

The table below shows mortgage refinance rates and fees for leading lenders in your area.  We recommend that you contact multiple lenders to select the refinance option that best meets your needs.

The final point to consider when you are deciding if you should refinance is your mortgage program.  Some borrowers use refinancing as an opportunity to change loan programs and this may be more important than possible financial benefits.  

For example, if you have an adjustable rate or interest only mortgage you may want to refinance into a fixed rate mortgage for greater certainty, especially if interest rates are rising. In some cases it may make sense to refinance to switch your mortgage program even if your interest rate, monthly payment and total interest expense increase.

In closing, there are many reasons to refinance your mortgage and the decision to refinance comes down to your financial and personal goals.  It is important to consider your potential mortgage payment savings, how long it takes you to recover your closing costs, total interest expense and your loan program to determine if refinancing is right for you.

Review Reasons to Refinance Your Mortgage

Sources

"Determining Whether to Refinance."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.