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When Should I Refinance My Mortgage?

Most savvy homeowners in California will want to consider a mortgage refinance to save money. A study by Black Night found that over five million homeowners with good credit and equity could save $215 per month on average if they refinanced. They also found that if you live in California, you can benefit the most, with an average savings of $300 off a typical monthly mortgage payment. But how do you know when to refinance your home loan? This article will walk you through the benefits of refinancing and help you decide if refinancing makes sense for you.

The Benefits of Refinancing a Mortgage

Refinancing your mortgage is the process of getting a new home loan to replace your current mortgage, which is why some people and lenders refer to a home refinancing as a second mortgage. Typically, homeowners refinance a home to either save money on their monthly mortgage payment or obtain cash. There are several benefits to refinancing your mortgage, including:

  • Reducing your monthly mortgage payment by securing a lower interest rate
  • Paying off your mortgage faster with a shorter mortgage term, like a 15-year home loan instead of 30-year mortgage
  • Paying down high-interest credit card debt by tapping into your home’s equity
  • Changing your mortgage term from adjustable to fixed to align with your current needs
Although many people could benefit from a lower rate, not everyone can qualify for a new mortgage. Additionally, other factors need to be considered, like closing costs, current mortgage rates, and the amount of equity built up in a home.

The Current State of Mortgage Rates

One of the most popular reasons to refinance is to get a lower mortgage rate. And if you’ve been watching the trends in mortgage rates, you’ve probably noticed that they are slowing increasing. To get an estimate on what your monthly mortgage payment could be, use our mortgage calculator and plug in the current mortgage rate.

Does it Make Sense to Refinance?

Refinancing your home loan isn’t free. You’ll need to pay for closing costs, attorney and bank fees at a minimum. To find out if refinancing makes sense for you, it’s a best practice to calculate your break-even point to find out how long it would take for the refinance to pay for itself in savings. Here’s how it’s calculated:

Break-even point (in months) = Closing costs/monthly savings


To illustrate, here’s an example of how this works:

  • $4,400 in closing costs (the average closing costs in California according to a Bankrate survey)
  • $300 of monthly savings (the average savings cited by Black Night for CA refinance data)
Using the figure above, it would take 14.6 months to break-even on the cost of refinancing, which is just a little over a year. The general rule is that if you are planning on staying in your home for longer than the break-even point, it’s a good idea to refinance.

Can You Qualify for a Refi?

To be able to refinance, you’ll need to consider a few key items. Here are some of the factors that lenders will assess to see if you qualify:
  1. The amount of equity in your home: Typically, lenders will require that you have a minimum of 20% equity before you can refinance. If you’re not there yet, consider making an extra mortgage payment or paying more than your monthly payment to pay down more of the principal.
  2. A good credit score: If your credit score has decreased since you took out your mortgage, you may not qualify for a new mortgage. Before you apply, improve your credit score. You may also want to consider tapping into a government program that can offer assistance, like HARP or FHA.
  3. Job and income stability: If you’ve been unemployed or have switched jobs over the last several years, that may hurt your chances of obtaining a lower rate. Lenders also like to see that you have extra cash on hand in case you lose your job. They usually don’t reward homeowners with a lower mortgage interest rate who are living paycheck to paycheck, or in credit card debt. You may want to bring on a co-borrower and take some time to build an emergency fund.
Refinancing can help homeowners save money or obtain cash, but everyone’s situation is personal and unique. We’re always here to help, and encourage you to reach out to one of our friendly home loan experts for a free consultation.

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E-Central Credit Union is a leading credit union located in Pasadena, California, serving Southern California members throughout Los Angeles County including Pasadena, South Pasadena, Alhambra, San Marino, Arcadia, Sierra Madre, Altadena, Temple City, Monrovia and beyond.