When Should I Refinance My Mortgage in Minnesota?

Refinancing makes sense when the benefits of a new loan outweigh its costs within the time you plan to stay in your home. The way to know is a breakeven calculation with your own numbers, not a general rule. Your lender can confirm the current rates, costs and terms for your situation.

What refinancing means

Refinancing means replacing your existing mortgage with a new loan that has different terms. Homeowners refinance for several reasons.

• To get a lower interest rate, which reduces the monthly payment and the total interest paid.
• To change the loan term, such as moving from a thirty-year loan to a fifteen-year loan.
• To change the loan type, such as moving from an adjustable rate to a fixed rate.
• To take cash out of the home's equity.
• To remove private mortgage insurance once equity has grown enough.

Each goal calls for a different analysis, so start by naming yours.

Why a rate drop alone is not enough

You may have heard a rule of thumb that says to refinance once rates fall by a certain amount. That guideline is an oversimplification, because it ignores your costs and how long you will stay.

A refinance has closing costs. They usually include a loan origination fee, an appraisal fee, title insurance, title search fees, recording fees and other lender costs.

Here is an example. If a new loan saves you $200 per month and the closing costs are $6,000, your breakeven point is thirty months. Stay longer than that and you come out ahead. Sell sooner and you do not recover the costs.

A no-closing-cost refinance does not remove these costs. The lender either adds them to your loan balance or gives you a slightly higher interest rate.

When refinancing tends to make sense

• Rates have dropped and the math works. Your breakeven point is comfortably shorter than the time you plan to stay.
• Your credit has improved. If your credit score is much stronger than when you bought, you may qualify for a better rate than you received then.
• Your loan type no longer fits. Moving from an adjustable rate to a fixed rate gives you a steady payment. Removing private mortgage insurance may save more than the refinance costs.
• Your goals have changed. If your income has grown, a shorter loan term may now be within reach.

When it may not make sense

• You are late in your loan. In the later years, more of each payment goes to principal. Refinancing restarts that schedule and can raise your total interest even if the payment drops.
• You plan to sell before the breakeven point. In that case the refinance costs you money.
• You want cash for spending. Taking cash out for something that is not a home improvement or a real financial need raises your balance and your total interest.

How a cash-out refinance works

In a cash-out refinance, you borrow more than you currently owe and receive the difference in cash, minus closing costs.

This can make sense when the money pays for home improvements that add value, or when it consolidates high-interest debt at a lower mortgage rate. It also has tradeoffs. Your loan balance goes up, you pay more total interest over time, and you keep a smaller equity cushion if home values fall. Talk with your lender or a financial advisor before you take cash out.

How to evaluate a refinance

• Gather your current rate, remaining balance, monthly payment and years left. Your mortgage statement has these.
• Ask more than one lender for an official loan estimate. These are standardized, so you can compare them side by side.
• Compare your current principal and interest payment with the new one to find your monthly savings.
• Add up the total costs from the loan estimate.
• Divide the costs by the monthly savings. The result is your breakeven point in months.

If the breakeven point is longer than you expect to stay, waiting is a reasonable choice.

Minnesota details to know

A Minnesota refinance usually includes title insurance and county recording fees, which vary somewhat from county to county. Your new lender will also order an appraisal, which may show more equity than you realized.

If you bought with down payment assistance through Minnesota Housing or a similar program, confirm whether that assistance has refinancing restrictions or recapture provisions before you proceed.

Common questions

Does refinancing hurt my credit score? Applying involves a hard credit inquiry, which can lower your score by a small amount for a time.

Can I refinance if my home has lost value? Your options are more limited, because most refinance programs require a minimum amount of equity. Your current lender is the best place to start.

Can I refinance if I have a second mortgage or home equity loan? Yes, but it adds steps. The holder of the second loan usually has to agree to stay in second position behind the new loan.

If you are thinking through a refinance and how it fits your plans for the home, send us a message. We can point you to a lender who will run your numbers. If equity is part of your decision, our home valuation page is a good place to start.