Should You Refinance Your Home?

Refinancing your home means taking on a new mortgage to replace your existing one. This could offer several financial benefits. But not all refinances are created equal. Some refinances may seem appealing on the surface, but may actually move you further from Financial Freedom.

So, when does refinancing make sense? Here's everything you need to know.

Reasons to Refinance

The main goals of refinancing your home should be to pay less interest and pay off your mortgage sooner. A refinance might be worth considering if it:

Reduces Your Interest Rate

A lower interest rate doesn’t automatically make refinancing worthwhile, but a rate drop of around 1 percentage point or more is a good reason to run the numbers. Even a smaller drop could slash a lot of interest if you have a big balance or decades left on your mortgage.

Shortens Your Term

Refinancing from a 30-year mortgage to a 15- or 20-year term can cut years of payments and thousands of dollars in interest. Just keep in mind, your monthly payment may go up. But if the higher payment fits your budget and broader financial goals, the long-term savings could make it a worthwhile tradeoff.

Converts an Adjustable Rate into a Fixed One

An adjustable-rate mortgage (ARM) can provide attractive introductory terms. But over time, an ARM can leave you exposed to market-driven rate increases, making your payment less predictable. Refinancing to a fixed-rate mortgage gives you stability and a defined path to becoming mortgage-free. It's also an opportunity to move into a shorter-term mortgage.

Refinance Red Flags

Not every refinance moves you closer to Financial Freedom. You should be cautious about a home refinance if it:

Extends Your Payoff Timeline

One of the most common reasons homeowners refinance is to lower their monthly payment. But it can also be one of the biggest mistakes. While a lower payment can provide short-term relief, restarting a 30-year mortgage could keep you in debt longer and increase the total interest you pay over the life of the loan.

Costs More Than It Saves

Refinancing comes with costs, including closing fees and other lender charges. Some refinances may increase your monthly payment, but could be worth pursuing if they shave years and thousands of dollars of interest payments off your mortgage — more on that later. However, if the savings from a lower rate are minimal, your closing costs could override any refinancing benefits.

Treats Your Home Like an ATM

A cash-out refinance may seem tempting, especially when home values have increased. But home equity is one of the most powerful ways homeowners build wealth. Using that equity to fund short-term wants turns the wealth you've already built into new debt secured by your home. You could also increase your mortgage payment or extend the time it takes to become debt-free.

How Do You Know if Refinancing Makes Sense For You?

Reducing your interest rate, shortening your term, and converting to a fixed-rate mortgage are all good reasons to consider refinancing. But the numbers still need to work for your budget and your long-term financial goals. The best refinancing decision is one that strengthens your overall financial position — helping you manage your monthly budget, maintain financial security, reduce debt, and build long-term wealth.

In many cases, the most beneficial refinances aren't the ones that simply produce the lowest monthly payment. They're the ones that help you pay less interest and become mortgage-free sooner.

If you can lower your interest rate, shorten your term, and reduce your monthly payment at the same time, even better. But you don't necessarily need to check all three boxes for refinancing to make financial sense.

As a general rule, though, try to keep your total monthly housing payment, including principal, interest, property taxes, homeowners insurance, and applicable association dues, at or below 25% of your take-home pay. If a refinance fits within that guideline, the next step is evaluating the potential savings and the costs involved.

Look at Refinance Savings

Let's say you still owe $375,000 on your mortgage, have 26 years remaining, and are paying an 8.5% interest rate. If you refinance to a 15-year mortgage at 6.00%, here's what that could look like:

This is an illustrative example, not a loan offer or rate quote, and these estimated savings are before refinancing closing costs, which could reduce the overall financial benefit. But it shows how a slightly higher payment today could create significant savings tomorrow.

In this hypothetical, the monthly principal & interest increases by about $178. However, you'd pay off the mortgage 11 years sooner and avoid more than $360,000 in interest.

Once the mortgage is paid off, that monthly payment can be redirected toward investing and other financial goals, giving your money more time to grow. That's a huge win for building wealth on your journey to Financial Freedom.

Don't Forget Closing Costs

A traditional mortgage refinance break-even analysis looks at how long it takes for monthly payment savings to offset refinance closing costs. That's useful when a refinance lowers your monthly payment, but it doesn't tell the whole story when you're refinancing into a shorter term with a higher payment.

Still, don't ignore closing costs. They can total thousands of dollars, typically ranging from 2% to 6% of the loan amount, depending on your loan, lender, location, and other factors. Those costs reduce your overall savings. Consider how long you expect to remain in the home and whether you'll have enough time to realize the savings from refinancing after accounting for them.

What if Refinancing Isn't the Best Option?

Refinancing isn't always the right move. Maybe your current interest rate is already lower than what’s available today. Or maybe the higher payment of a shorter-term mortgage simply doesn’t fit your budget.

That doesn’t mean you have to settle for your current payoff timeline. If your mortgage allows it, making extra payments toward principal could reduce the interest you pay and help you pay off sooner — no refinance required.

Let's revisit our previous example. Refinancing from a 30-year term to a 15-year term increased the monthly payment by about $178. If that isn't realistic for your budget, you can still make progress without refinancing:

• Paying an extra $50 toward principal each month could help you pay off your mortgage about 1 year and 5 months sooner and save more than $37,000 in interest.

• Increasing that extra payment to $100 per month could shorten your payoff timeline by nearly 2 years and 9 months and save more than $70,000 in interest.

Run the Numbers on Your Mortgage

Ready to explore a refinance? Start by using our mortgage refinance calculator to compare your current mortgage and refinancing options.

Not sure whether refinancing aligns with your financial goals? A FAIRWINDS mortgage expert can help you evaluate your options. At FAIRWINDS, our goal isn't simply to help you refinance your mortgage. It's to help you make the decision that's best for your Financial Freedom, even when that means keeping the mortgage you already have.

Call 888-413-0672 or make an appointment with a FAIRWINDS mortgage expert to talk it over.