Does a Mortgage Refinance Make Sense? Find Out in 4 Steps.

When mortgage interest rates are low, refinancing your home loan is a no-brainer. But how do you know it's time to refinance when rates are hovering a bit higher? Despite popular belief, there isn't a one-size-fits-all rule for mortgage refinance rate reductions.

Some experts have long recommended homeowners try to secure a minimum rate reduction when refinancing their home loan. But aiming for a specific rate decrease doesn’t always align with homeowners’ goals. Focusing on a specific rate reduction threshold can also be misleading depending on the mortgage balance and current mortgage rate – even the smallest rate reduction can lead to serious savings if you have a larger loan balance.

Those homeowners with a first and second mortgage or variable-rate HELOC should look beyond minimum rate reduction rules. Refinancing allows them to consolidate the loans to improve the overall combined mortgage terms, including combating future rate fluctuations that can be costly with a variable-rate loan.

Instead of aiming for a specific rate drop, try using the following approach.

How To Evaluate Mortgage Refinance Savings

Here is an approach recommended by our mortgage experts. It focuses on your anticipated costs and break-even point instead of total rate reduction. This can help you align your refinance with your broader financial goals.

1. Determine Your Mortgage Refinance Goals

There are plenty of reasons why homeowners choose to refinance, such as:

• Reducing the total interest paid on a home.
• Lowering the monthly mortgage payment.
• Consolidating a first and second mortgage to improve combined mortgage terms.
• Combatting future rate fluctuations of a HELOC or other variable-rate loan.
• Getting cash to pay for a home improvement or for a down payment for another property.
• Paying off high-interest debt through debt consolidation.

Reducing your mortgage rate can help accomplish many of these goals. But there may be additional ways to get the savings you have in mind. Especially if there is opportunity to eliminate PMI or extend the term of the loan. In fact, we have a full article dedicated to other ways to save with a mortgage refinance.

2. Understand Your Mortgage Refinance Costs

When calculating your savings, you need to include your out-of-pocket costs. Here are some potential mortgage refinance costs.

• Lender’s fee - many mortgage lenders have an application, origination, or processing fee.
• Appraisal fee - this depends on the age of the most recent appraisal.
• Other third-party fees - these may include recording and title services.
• Discount points - you may be able to pay fees toward an even lower mortgage rate.

These expenses will be included in your Loan Estimate, so there should be no surprises at closing. The appraisal fee is typically the one fee you’ll have to pay up front. Often, you’re able to roll the other costs into your new mortgage balance. If you go that route, be sure to keep the extra interest expense in mind

3. Calculate Your Potential Monthly Savings

Once you have an estimate of your refinance costs, you’re ready to calculate your mortgage savings. First, determine your estimated new interest rate. Mortgage rates are constantly changing, so you’ll want to use today’s mortgage refinance rates to get the most accurate picture.

Then, use a mortgage refinance calculator to estimate your new monthly payment. Our calculator provides a comparison so you can get your estimated savings.

4. Complete a Mortgage Refinance Break-Even Analysis

It’s important that you also run a break-even analysis to determine how long it will take to recoup your refinance costs.

You can calculate your break-even point by dividing the mortgage refinance costs by your monthly payment savings. For example, if your closing costs are $1,500 but your new monthly payment is $150 less each month, you’ll break even in 10 months.

Pro Tip: Our mortgage refinance calculator includes a break-even analysis in the results so you don’t have to manually crunch the numbers.

It all comes down to how long you plan to stay in your house. If you’re going to call it home for longer than the time it takes to break even, then it may make financial sense. But if you’re not sure, then you’ll want to take pause before you move forward with your mortgage refinance.

Additional Tips for Mortgage Savings

We receive a lot of mortgage refinance inquiries from homeowners. While the specific questions vary, they often relate to one of the following two questions.

How can I get the best rate for my mortgage refinance?

Securing a great rate can go a long way to reduce your monthly payment. Here are two ways you can achieve that goal.

• Pay points for a lower interest rate. This requires up-front cash but can help you achieve more long-term savings by reducing your lifetime interest expense.
• Use rate alerts to track daily mortgage rates. We offer a free Rate Watch service that delivers mortgage rates straight to your inbox. You can configure it by frequency or according to a specific rate. With these regular updates, can act immediately to snag your best rate.

How can I reduce my mortgage refinance costs?

Here are three ways to keep more money in your pocket with your upcoming mortgage refinance.

• Choose a low-fee mortgage lender. Hint: Axos Bank is a great option thanks to our $0 lender fee!¹
• Roll your closing costs into your new loan. This reduces out-of-pocket expenses so you can preserve your current savings and direct those dollars toward other near-term goals.
• Select a rate that has a credit toward closing costs. Some lenders allow you to take a slightly higher mortgage rate to reduce your closing costs. This can be helpful if you think rates may reduce further in the future.

Axos Bank Is Here to Help

Need help running the numbers? Let us know. Our mortgage specialists can run scenarios for you to help you determine if a mortgage refinance will help you achieve your specific goals. If you’re interested in a no-cost, no-pressure consultation, call us at 888-546-2634.

Not ready to take that step? You can continue to prepare by reviewing our mortgage refinance guide, so you know what documents to have handy when you’re ready to start your refi.

Does a Mortgage Refinance Make Sense? Find Out in 4 Steps.

This blog was published by Axos Bank on June 7, 2023, and last updated on June 7, 2023.

¹On new first-lien mortgages, Axos Bank will waive its full lender fee for loan amounts of $250,000 and above or reduce its lender fee by $200 for loan amounts of less than $250,000 if deposit account conditions stated below are met. Applicant is responsible for all third-party fees and all prepaid items. To qualify for the lender fee discount, the mortgage applicant or co-applicant must currently own (as a primary or joint owner) or open a new Axos Bank, Axos Bank for Nationwide, or UFB Direct personal deposit account during the mortgage application process AND an available balance of at least $500 must be present in the qualifying personal deposit account at the time the Initial Closing Disclosure for the mortgage is issued. This offer may be modified or discontinued at any time. Please contact an Axos Bank Mortgage Loan Originator for additional details.