Refinancing To Save On Monthly Costs



Choosing to refinance your home can lead to saving both on monthly costs and in the long term. As finance rates fluctuate, you could benefit so it’s important to keep an eye out for the possibility. 

While most homeowners think refinancing means changing their interest rate, there can be several other factors to consider when you refinance your mortgage. Changing your interest rate can certainly be worth it, but tie that in with some other adjustments and you could save a couple of hundred dollars per month.

What is Refinancing?

If this is your first time refinancing a mortgage, you may not know what to expect. While the process may seem a bit confusing at first, it’s really quite simple.

When you refinance your loan, you’re really just taking out a new loan to replace the old one. You won’t need to pay a down payment to refinance, but in most cases, you will have to cover closing fees. Some lenders will offer you a higher interest rate and cover the closing costs for you while others may allow you to integrate the closing costs into your new monthly payments.

Refinancing can be done with different lenders. Sometimes, your current lender will work with you to refinance your existing mortgage but if this isn’t possible, other lenders are often willing to do so. 

What Interest Rate is Worth Refinancing For?

You might only be able to change your interest rate by 1%. Maybe even less. While 1% isn’t very big, it can certainly be worth it. Here’s a quick example:

Say you took out a loan for $250,000 and your interest rate is 3.75%. By dropping your interest to 2.75%, you could save around $250 per month and it should take just under 2 years to break even with your closing costs. If money is tight or you have an emergency come up, having this extra savings is definitely with refinancing.

Maybe you’re only able to drop your interest by 0.5%. In most cases, this is only worth it if you plan on keeping the loan for over 3 years or the lender covers your closing costs. If you aren’t planning on keeping the loan for that long or your lender won’t cover closing costs, it may not be worth it. 

When your interest drops less than 0.5%, it really isn’t worth it. There are a few scenarios where you could still benefit from a reduction of 0.25%. If you switch from an adjustable rate to a fixed-rate mortgage, if you have a big loan balance, or you are able to consolidate your mortgage into other existing debts with a high interest rate.

If you want to see personalized numbers and be able to adjust them, here’s an easy refinancing calculator offered by Zillow that can show you rates and costs that are specific to your situation.

How Else Can I Save Money on Refinancing My Mortgage?

Aside from looking for a better interest rate, here are some other ways you can save money and refinance your mortgage.

#1. Improve Your Credit

Low credit scores are going to have a direct impact on your mortgage and refinancing capabilities. If you work on improving your credit before attempting to refinance, you could be offered a lower interest rate right from the start. Typically, you’ll need a credit score of at least 740 to get the best rates but this can be difficult to achieve.

You can start improving your credit by making sure to pay off all of your cards on time and quickly. Avoid opening new accounts and if possible, try not using your credit cards as often. As you work on improving your credit score, use an online credit checker so you have an accurate report to work off of.

It’s important to get your credit as high as possible before you refinance because once you apply, you’re stuck with whatever credit score you have. 

#2. Look At Other Lenders

Your current lender may be more than happy to work with you on a refinance, but they may not have the best rates. Before you agree to refinance your mortgage with your current lender, look around at a few other lenders. 

If your credit score has improved since you first took out your loan, other lenders may have better rates available to you from the get-go. Don’t assume that your current lender is the best option before you check out the competition.

#3. Consider a No-Closing Costs Mortgage

When you refinance your mortgage, you’ll likely have to pay closing costs. These costs tend to hover around $5,000 according to Freddie Mac. In some cases, paying a closing cost may be better for you because it means you’re much more likely to have a lower interest rate. However, there are times when a no-closing costs refinance is better.

When you choose a mortgage with no closing costs, these costs are actually just tied into your monthly payments. This generally leads to a higher interest rate, but it can save you from having to pay a much larger cost at the end of your loan. 

#4. Consider an Appraisal

While not every lender will require an appraisal, it can certainly help. If your home has increased in value and is likely worth much more than what your current lender says it is, an appraisal can lower the loan to value rate of your refinance. An appraisal could also help you avoid paying for private mortgage insurance and help you earn a lower interest rate.

That being said, make sure you’ve finished all home renovation projects before the appraisal. You don’t want to be in the middle of renovating your kitchen when the appraiser comes as this can actually delay your refinance application and make more problems. 

The Bottom Line


Refinancing can lead to you saving on your monthly costs, but you’ll have to do some work and planning. Every lender will have slightly different rates and while one option may sound better than another, it’s worth running the costs through a calculator so you can be sure you’re getting a better deal. 

When you’re able to lower your interest rate, reduce your monthly payments, or adjust the loan time, refinancing can be a worthwhile effort. 

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