{"id":26545,"date":"2021-09-13T11:10:34","date_gmt":"2021-09-13T18:10:34","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=26545"},"modified":"2026-04-08T01:12:36","modified_gmt":"2026-04-08T08:12:36","slug":"should-i-refinance-my-mortgage","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/should-i-refinance-my-mortgage\/","title":{"rendered":"Should I Refinance My Mortgage? 8 Reasons You Should Hold Off"},"content":{"rendered":"

Unless you\u2019ve been living under a rock, you\u2019ve seen news reports touting record-breaking, rock-bottom mortgage interest rates<\/a>. According to the Federal Reserve Bank of Saint Louis, the average 30-year mortgage interest rate plummeted by 33% from January 2018 to January 2021, from 3.95% to 2.65%<\/a>.<\/p>\n

While your book club pals have been swapping the names of mortgage brokers, you\u2019re wondering whether you should jump on the refinancing bandwagon<\/a>. After all, you wouldn\u2019t want to miss out while everyone else is saving big bucks. So should you refinance?<\/p>\n

With a refinance<\/a>, you apply for a new home loan to pay off your existing mortgage. Most homeowners refinance to lower their interest rate, lower their monthly payment, or cash out on equity. The decision to refinance doesn\u2019t boil down to simply lowering your interest rate, decreasing your monthly payment, or cashing out equity. For example, a homeowner with a goal to pay off their loan as quickly as possible could benefit by refinancing from a 30-year mortgage to a 15-year term, even if the monthly payment increases.<\/p>\n

\u201cThere are many different ways a refi can be beneficial for someone. It\u2019s all about what the borrower is trying to achieve,\u201d comments Richie Helali, HomeLight\u2019s Mortgage Sales Lead.<\/p>\n

But refinance loans aren\u2019t free. You\u2019ll have to pay lender fees and third-party expenses to close your new loan. And there are some situations when, even with a lower interest rate or monthly payment, you may want to hold off on refinancing your home loan.<\/p>\n

We asked Helali to weigh in on when a homeowner should step back before filling out that mortgage refinance application. Read on to discover why your\u00a0overall financial picture plays a bigger role than a low-interest rate in determining whether or not you should refinance.<\/p>\n

\"A<\/a>
Source: (Chris Yang \/ Unsplash)<\/figcaption><\/figure>\n

Think twice about refinancing if\u2026<\/h2>\n

1. You\u2019re planning to sell in the next few years<\/h3>\n

Between lender fees and third-party charges, refinancing can cost 1% to 1.5% of your loan amount, says Helali. For example, if your refinance loan saves you $150 per month and you\u2019re planning to move in a year, you\u2019d lose money if you spend $3,500 in closing costs.<\/p>\n

One way to figure out whether it\u2019s worthwhile to refinance is to calculate your break-even point, or the amount of time it will take to recoup the closing costs. To do that, Helali says to take the total closing cost and divide it by the amount you\u2019ll save every month.<\/p>\n

So, if refinancing costs you $15,000 and drops your monthly mortgage payment by $150, it will take 100 payments (or just over eight years) before you recoup the cost. If you’re planning to sell<\/a> before the break-even point \u2014 eight years, in this example \u2014\u00a0 you end up losing money.<\/p>\n

2. You haven\u2019t built up substantial equity<\/h3>\n

Interest rates may be at historic lows, but if you don\u2019t have at least 20% in equity it may be better to wait until either your home\u2019s market value increases or you pay down your loan balance. If you refinance with less than 20% in equity, you\u2019ll have to pay for private mortgage insurance (PMI) (or mortgage insurance for federally insured loans) or accept a higher interest rate<\/a>. In some cases, lenders could also charge you more in closing fees.<\/p>\n

If you plan to refinance with a cash-out loan (known as a cash-out refinance), the amount of equity you have is even more crucial. That\u2019s because the equity in your home determines how much a lender is willing to loan<\/a> \u2014 and how much equity you can cash out. \u201cThe more equity you have, the more cash would be potentially available to you,\u201d says Helali.<\/p>\n

To figure out how much equity you have, calculate your loan-to-value (LTV). First, divide your current loan balance by your home\u2019s estimated value which will give you the LTV percentage. Then subtract the LTV from 100% and you get your equity percentage.<\/p>\n

Not sure what your home is worth? Plug your address into HomeLight\u2019s value estimator<\/a> for a free automated valuation.<\/p>\n

For example, a home with a $300,000 loan balance and a valuation of $400,000 has an LTV of 75%. Subtracting this figure from 100%, you have 25% equity.<\/p>\n

3. You plan on applying for an adjustable-rate mortgage (ARM)<\/h3>\n

While fixed-rate mortgages maintain the same rate throughout the life of the loan, ARM loans<\/a> only have a fixed rate for the set introductory period, usually 5, 7, or 10 years. After the introductory period, the rate adjusts at fixed time intervals.<\/a> The interest rate changes based on the market index listed on your loan note, along with your lender\u2019s margin<\/a>.<\/p>\n

For example, a 5\/1 ARM has a set interest rate for the first five years of the loan. After the initial term, the rate fluctuates based on the market conditions of each year thereafter. To determine the adjusted rate, add the current index rate and margin as detailed in your mortgage note.<\/p>\n

If your loan note lists the 6-month London Interbank Offer Rate<\/a> (LIBOR) as the index and 2.5% as the margin, your fully indexed rate at the time of your rate adjustment would be the sum total of the two<\/a>. So if your interest rate had reset in January 2021 when the LIBOR rate was 0.25%<\/a>, your adjusted rate would have been 2.75% (2.5% margin plus 0.25% LIBOR) until the next adjustment period.<\/p>\n

While it can be tempting to refinance into an ARM loan, which often has a lower introductory rate than a fixed-rate loan, it isn\u2019t the right choice for everyone. After the introductory period, there\u2019s a chance that the interest rate (and your monthly payment) could increase when the rate adjusts.<\/p>\n

If you refinance to an ARM loan, the adjustable rate could make budgeting difficult, particularly if you\u2019re on a fixed income or if your income fluctuates (if much of your income is commission-based, for example).<\/p>\n

4. You recently refinanced your home loan<\/h3>\n

You refinanced a few months back, but interest rates have continued to drop. Should you refinance again? There are two factors you should consider: how much you paid in closing costs for your recent refinance and the cost to close on another loan.<\/p>\n

If you haven\u2019t hit your break-even point on your last refinance, you may want to reconsider \u2014 you\u2019ll end up paying closing costs all over again with another refinance.<\/p>\n

5. You have a low loan balance<\/h3>\n

Chances are, if you\u2019re well into paying down your loan, most of your monthly loan payments are paying down your loan balance<\/a>. The further along you are in your loan payment schedule, the smaller the percentage of your payment goes toward interest fees.<\/p>\n

The bottom line: <\/b>A lower interest rate probably won\u2019t save you much. When considering the closing costs, refinancing a small loan balance may not have much financial benefit (that is, unless you\u2019re planning to tap into your equity).<\/p>\n

Also, it may be tough to find a lender that will accept a loan application for less than $100,000<\/a>. Some lenders shy away from small-dollar refinance loans because they aren\u2019t as profitable as larger loan amounts.<\/p>\n

6. You recently turned your side hustle into a full-time gig<\/h3>\n

Did you ditch your day job less than two years ago? If you had a salaried position when you applied for your current loan and have since transitioned to running your own business, it could be tougher to get your refinance loan approved<\/a>.<\/p>\n

That\u2019s because loan underwriters scrutinize self-employed borrowers differently than W-2 employees. Freddie Mac and Fannie Mae<\/a>, the federally backed mortgage companies that buy and guarantee loans issued by lenders<\/a>, require at least two years of self-employment<\/a> to prove stable income.<\/p>\n

Less than two years of self-employed income could be acceptable in certain situations, but you\u2019ll have to document:<\/p>\n