After several years of rising interest rates, we’re finally seeing a downward trend. For many homeowners, that means refinancing is back on the table. A lower rate could translate into significant monthly savings or allow you to pay off your home sooner. But refinancing isn’t right for everyone, and knowing when and how to do it can make all the difference.
What is Refinancing?
Refinancing simply means replacing your current mortgage with a new one — ideally with better terms. There are three main reasons why people refinance:
- Lower the interest rate. Lower rates reduce monthly payments, which can save thousands over the life of the loan.
- Shorten the loan term. Switching to a shorter loan term, such as going from a 30-year to a 15-year mortgage, lets homeowners pay off their home sooner, save on interest, and build equity faster.
- Tap into home equity. A “cash-out refinance” lets homeowners access some of the equity they’ve built up for major expenses, like home improvements or college tuition. While this can be a smart move in the right situation, it’s important to remember that tapping equity increases your overall debt, so it’s worth weighing carefully.
When Does Refinancing Make Sense?
Not every drop in rates justifies refinancing. A good rule of thumb is that it’s worth considering if you can lower your interest rate by at least half a percent — and ideally a full percent. The earlier you are in your mortgage term, the more you stand to save over time. But refinancing isn’t free. You’ll likely pay closing costs that include an appraisal, title work, and origination fees. That’s why it’s helpful to calculate your “break-even point,” which is how long it takes for the monthly savings to offset those upfront costs. If you plan to move soon, you may not be in the home long enough to come out ahead.
Who Benefits the Most Right Now?
This is a particularly good moment for homeowners who took out their mortgage when rates were much higher and now have a chance to reset at today’s lower levels. Families looking for a little more stability in their monthly budget can also benefit from lower payments. And if your credit score has improved since you first bought your home, you may qualify for better terms — which can make refinancing even more worthwhile.
Getting Ready to Refinance
Before you dive in, it pays to do a little prep work.
- Check your credit score. A stronger score can unlock better rates and terms.
- Gather key financial documents, like pay stubs, tax returns, and details on any debts you carry.
- Have your home appraised. Your home’s current value will affect the rate you’re offered.
- Run the numbers. Calculate savings vs. costs with online calculators or your banker.
- Contact a Midwest BankCentre banker to discuss your options.
Common Refinance Pitfalls
Refinancing can be a smart financial move, but there are a few dangers to avoid. One of the biggest is extending your loan term without realizing it. If you’ve already paid off 10 years on a 30-year mortgage and you start over with a new 30-year loan, you may end up paying much more in interest over the long run — even if your monthly payment is lower. It’s also easy to focus only on the size of the monthly payment and forget about the total cost of the loan. And while using home equity can be helpful for big, important expenses, it can also create long-term debt if used for non-essentials.
A Banker’s Advice
As a community banker, I encourage homeowners to think beyond just the monthly savings. Refinancing is a tool to help you reach your bigger financial goals — whether that’s becoming debt-free faster, saving for retirement, or simply making your budget more comfortable. The key is making sure the new loan puts you in a stronger position for the long run.
Making Your Move
Interest rates coming down creates real opportunities, but refinancing is not a one-size-fits-all solution. Carefully weigh the costs, the potential savings, and your long-term plans before making a decision.
Start by talking with a trusted Midwest BankCentre mortgage banker. We can help you run the numbers and see whether refinancing now can give you and your family a stronger financial foundation for the years ahead. Give us a call at 314-631-5500 or visit MidwestBankCentre.com. small business owners across the Midwest, helping them build the financial foundation they need to succeed. If you’d like guidance on building business credit or preparing for financing, we’re here to help. Call us at 314-631-5500 or visit MidwestBankCentre.com to start the conversation.
Originally published in the Labor Tribune’s October publication by Wes Burns, Executive Vice President of Community and Economic Development.