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Should you refinance your mortgage? When it might be worth it

What we'll cover

  • What to consider when refinancing 

  • Types of refinancing

  • When it makes sense to refinance

Refinancing can be a wise financial move, but it's crucial to evaluate whether it's worth it for your specific situation. Taking these factors into account will help you make an informed decision and determine if refinancing is the right choice for you.

Things to consider before a home refinance

Breaking down the basics of a mortgage refinance is a good place to start. Whether you should refinance depends on several factors, including:


  • The length of time you’ve owned your home

  • How long you plan to stay in your current home

  • Your breakeven point — the amount of time that’s needed for your interest savings to exceed your refi closing costs


  • The amount you initially borrowed

  • How much of your loan is outstanding

  • Expense of closing costs — appraisal, title search, application fees - and more, which can cost between 3% and 6% of your loan’s principal


  • Your current interest rate

  • Your current loan term

  • Your new loan conditions


  • Your credit history and score

  • Whether you’re looking to withdraw cash (aka equity) from your home

  • Your other refinance goals

And whether you're considering a rate-and-term, a cash-out, or a cash-in refi (the three most common types of refinancing loans), you can use Ally's  refinance calculator to see whether refinancing is worth it from a financial persepective. 

6 reasons you might refinance your mortgage

 1. Lower your interest

Reducing your interest rate lowers how much you pay in interest each month, as well as the total amount you pay for your home.

If you refinance to a loan with a lower interest rate and a shorter term (from a 30-year fixed-rate loan to a 15-year fixed-rate), it may not reduce the amount of your monthly payment (in some instances, it could even increase), but you'll still pay less overall in interest over the life of your mortgage.

2. Reduce the total cost of your monthly mortgage payment

If a better interest rate isn't an option, you can reduce your monthly costs by refinancing to a mortgage with a longer term than the repayment period that's left on your current loan.

3. Convert from an adjustable-rate mortgage to a fixed-rate one

Adjustable-rate mortgages (ARMs) can be an alluring option for homebuyers because you can secure a lower introductory rate during the early years of owning your house. In exchange, your loan's rate has the potential to increase after that initial period. If interest rates have gone up since purchasing your home, you're likely looking at a higher rate when your ARM adjusts — putting an unexpected strain on your budget.

4. Reduce your loan term

When interest rates fall, you could have the opportunity to refinance your existing loan for a shorter term that allows you to pay off your home faster without much change to your monthly payment. Reducing your loan term can also lower the total amount of interest you pay over time, but your ability to do so greatly depends on your financial capability and flexibility.

5. Use your home's equity to finance something else

If you've owned your home for a considerable amount of time or your home's value has increased since you first purchased it, you could tap into the equity you've built (the money you've already paid toward your house) by refinancing — aka a  cash-out refinance . And those funds could be used for things like home repairs, home renovations or even unrelated costs, such as education.

6. Consolidate debt

A debt-consolidation refinance lets you refinance to a fixed-rate while pulling out equity to pay off outstanding non-mortgage debt. When used carefully, it can be a valuable tool to pay back a debt that sometimes seems impossible.

Determining whether mortgage refinancing is worth it depends on various factors unique to each individual's financial situation. While refinancing may offer potential benefits, assess your financial goals to ensure that refinancing aligns with your needs and objectives.

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