Refinancing can also help you shorten your loan term and pay off your mortgage sooner

Before you consider a refinance, you should have at least a rough idea of how long you plan to be in the

home. If you’re not sure, or if you expect changes in your job or living situation in the near future, a refinance might not be wise.

4. What’s your refinance goal?

Or you can use the new loan to tap home equity for home improvements or to pay off higher-interest debts. Home improvements can add to your home value, enhancing your real estate investment even more.

5. What does your current loan look like?

Before choosing to refinance, you should have a good idea of how much you owe on your current home loan and how long it would take you to pay off the balance.

If you’ve almost paid off your current loan, you could wind up paying more in total interest payments by resetting your balance with a refinance — even at today’s rates.

For instance, if you’re eight years into a 30-year loan, consider refinancing into a 20-year loan. You could potentially shave a couple years off your loan and reduce your payment.

Also, check to see if your current lender charges prepayment penalties. These fees would add to your total costs, eating into your savings as well. If your current home loan was originated before 2014, it’s possible you could face a prepayment penalty.

Mortgage refinancing FAQ

It could be. To find out for sure, compare your closing costs, which you’ll pay up front, to your long-term savings which build up gradually. If you can save more than you’ll spend, it’ll be worthwhile to refinance. Often, answering this question depends on how long you plan to stay in the home. Refinance savings build gradually over time while closing costs are due up front.

Refinancing is worth it when your new home loan accomplishes a goal your current home loan could not accomplish. For example, some borrowers just want to eliminate their existing FHA loan’s mortgage insurance premiums, and refinancing into a conventional loan can make this happen. Others want a lower-rate loan, a lower monthly payment, or to cash out equity. Whether or not a refinance is worth it for you will depend on your existing mortgage and your financial goals.

A refinance starts your loan over. So you need to be sure you won’t end up paying more in the long run — which can happen with a longer term even when your monthly payments are reduced. Refinancing also costs money, and applying for a new loan will require some time out of your schedule. This could be time and money well spent if it helps you save money for years into the future.

Getting any new loan can lower your credit score temporarily. But the impact of a mortgage refinance on your credit score should be minimal. Why? Because your new loan replaces your existing loan, and the new loan is usually about the same size as the old loan. A cash-out refi could have a bigger effect on your credit profile because it results in a larger mortgage balance.

Divide your closing costs by the amount of money you’ll save each month to find out how long you’ll need to break even on your new mortgage. For example, if you’re spending $4,000 on closing costs and saving $200 a month on your mortgage payment, you’d divide $4,000 by $200 which equals 20 months. If you expect to stay in your home longer than 20 months, you’ll save money. If you’re getting a shorter-term loan, the math is more complicated. You’ll need to compare long-term interest charges on your new and old loans. Generally, if you can save enough interest in the first two years to cover the new loan’s closing costs, a refinance should save you money. And the longer you stay, the more you’ll save.