In September 2024, the Fed lowered interest rates for the first time in years, which has many doctors in our physician communities considering mortgage refinancing. There are many questions about when the best time to refinance a mortgages is and how much lower interest rates should be than your current mortgage before refinancing makes sense. Although getting a better interest rate is the most common reason physicians decide to refinance mortgages, there are many other scenarios in which refinancing may come up, as well as many reasons not to refinance. Below, we guide you through what to take into account before looking into refinancing, provide rules of thumb, and show you how to do a breakeven calculation so that you can decide on when and if refinancing is a good idea for your personal situation, and when it is not.
This page is sponsored by Tom Raschka, NMLS 205578, who is a mortgage agent that specializes in assisting physicians with their mortgage refinancing needs. You can contact him here to explore refinancing today.
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What is a mortgage refinance and how does it work?
A mortgage refinance (refi) is a way to replace your previous mortgage with a new one. With a mortgage refi, you completely rewrite the terms of your original mortgage, including the principal balance, interest rate, mortgage term, and payment schedule. The lender pays off your previous mortgage with your new one, and you start your mortgage over under the terms of the new agreement.
In order to refinance your mortgage, you will need to go through a similar process as when you first assumed your mortgage, including a credit check. You will provide current financial documents and will likely pay for a current home appraisal. The loan will go through the mortgage underwriting process. A mortgage refinance, on average, can take a month or a month and a half to complete.
A mortgage refinance is different from a mortgage recasting. Learn more about mortgage recasting versus refinancing.
When should doctors consider refinancing their mortgage?
Refinancing your mortgage can potentially save you a lot of money, but remember that it’s not free. Closing costs add up quickly to many thousands of dollars, so it isn’t always the best solution at any given time. While a lower interest rate can entice many to consider refinancing, it isn’t the only factor you should consider when deciding whether to refinance your mortgage.
The TLDR is that your individual situation is actually much more important than the interest rate that you’re getting, and it’s important to run the numbers for how much money you’ll actually save in the projected time you’ll stay in the house versus how much it’ll cost you to refinance.
Common reasons why refinancing turns out not to be a good idea even if interest rates have improved include:
The decrease in interest rate isn’t enough to offset the closing costs of the mortgage.
You won’t stay in the house or keep the mortgage long enough to make the money you spend on refinancing offset the refinancing costs.
Your credit score or debt to income ratio are less favorable than when you secured your mortgage, or your home value has decreased since you bought it, resulting in worse rates.
Your household income has decreased or you have switched to locums and now have more trouble going through underwriting.
You are too far into your mortgage to reset the length of your mortgage, or can’t afford a shorter term mortgage, thus resulting in paying more in interest over the life of the loan.
PSG Resources and Perks: Contact our sponsor, Tom Raschka, NMLS 205578, who is a mortgage agent that specializes in assisting physicians with their mortgage refinancing needs. You can contact him here to explore refinancing today.
Factors to consider when deciding whether or not to try to refinance your mortgage
Interest rates. Refinancing to lower your interest rate is usually the best reason to refinance your mortgage. Depending on the length of your mortgage loan and the balance you have remaining, a significant drop in interest rates can save you tens of thousands of dollars over the life of your mortgage. You should calculate exactly how much money you will save in interest during the time you intend to keep the mortgage. Read more below about assessing interest rates for refinancing.
Associated refinancing closing costs. As you will be assuming a new mortgage, you will have closing costs with a mortgage refinance. Closing costs can vary depending on the lender, but are typically around 2%-5% of the amount of the new mortgage. Depending on the difference in interest rates and your reason for refinancing, the refi costs may not be worth the benefit of the refinance.
Pro PSG tip: Negotiate your closing costs. You will have more leverage to do this if you have another offer in hand, so consider running quotes across multiple lenders. PSG Resources and Perks: Contact our sponsor, Tom Raschka, NMLS 205578, who is a mortgage agent that specializes in assisting physicians with their mortgage refinancing needs. You can contact him here to explore refinancing today.
Your debt-to-income (DTI) ratio. Banks will often look at your overall debt burden and compare it to your income. If your debt has increased since you took out your current mortgage, or if your household income has dropped, your DTI might now be at a point where you won’t qualify for a new loan or will qualify for a less favorable interest rate. Typically, you’ll want at least 20% equity in your home to qualify for better rates.
Your current credit score. When you apply for a mortgage refinance, the lender will run a credit check. If your credit score has improved since you obtained your original mortgage, you may qualify for a higher tier interest rate, which can further reduce the overall cost of your loan. If your credit score has worsened, however, you may not receive as much benefit from refinancing with regard to the interest rate.
Note: if you have a credit freeze to protect against identity theft, data breaches, and fraud, don’t forget to temporarily unfreeze it when applying for a refi.
Your remaining mortgage length. The closer you are to the end of your current mortgage or selling your house, the less likely refinancing is to make sense in your situation. Likewise, if you are currently paying off your mortgage early as you approach retirement, you are already significantly chipping away at the total interest. If you only have a few years left in either your mortgage term or in your payoff schedule, you will likely be better off continuing your current plan versus refinancing and paying closing costs.
Common reasons why physicians consider refinancing their mortgages, and whether they make sense
Refinance to a lower interest rate
As noted above, refinancing to a lower interest rate is usually the best reason to refinance your mortgage. That isn’t always the case though.
As a general rule of thumb, members in our physician online community say to target around a 1% drop in interest rates before considering a refi. Once interest rates drop, get a few quotes on what available interest rates are that you can qualify for, and make sure to factor in (and negotiate!) the associated closing costs so that you are comparing apples to apples.
Once you have these numbers, you can use a mortgage amortization spreadsheet (many free versions exist online) to help you determine if you can save money over the life of the loan. Compare the total interest paid over the life of your current mortgage to the total interest paid plus closing costs under the available refinancing option. Note that you should factor in how long you are actually planning on staying in the house, not how much you’ll save if you stay the full length of the mortgage if you are not planning to be there forever.
One thing to note when deciding when to refinance when it is projected that interest rates will continue to drop: It’s hard to decide when the best time to refinance is, as you don’t want to pay closing costs twice. There’s unfortunately no crystal ball to optimize timing. The news and general market trends can help guide whether you want to wait another month or two, but don’t get stuck in analysis paralysis waiting for the “perfect” time and leave money on the table in the interim. It’s easy to get stuck waiting or to forget to do the refinance later if life gets in the way. If you run the math above and can save significantly, it may be better to just pull the trigger and then wait for another opportunity to refinance again in the future.
Refinance to free up income with a smaller monthly payment
Some doctors consider refinancing their mortgage to a longer term simply because they are having a hard time making the payments and/or are feeling house poor. While the longer term may reduce your monthly payment, this approach is generally not recommended. For one, you will probably pay more in interest over the life of the new loan. Secondly, freeing up more money in your budget may just lead to you spending more on discretionary expenses in your budget, like that new car you've been wanting with all the upgrades. Both of these things would hurt your personal finances and retirement goals more in the long-term even if it helps the short-term situation.
If interest rates are lower and you are refinancing anyways, then it may make sense to think about what term is the most comfortable for you. Try, though, not to increase the total amount of interest you're paying. Either way, we recommend putting together your physician budget to see where you may be able to reduce other monthly expenses to free up cash flow.
Refinance to remove PMI
If you have more than 20% equity in your home, you may consider refinancing to remove the PMI (private mortgage insurance), which is another way to reduce your monthly mortgage payment. While this can be a benefit to refinancing, you don’t have to refi to remove PMI. If that’s the only reason you’re considering a refinance, talk to your current lender first to save yourself the closing costs associated with a refinance.
Refinance to reduce the length of your mortgage
Doctors may consider refinancing from a 30-year mortgage loan to a 15-year mortgage loan in order to pay off their house sooner. If your mortgage doesn’t have any pre-payment penalties (most don’t), then the better option usually is to just pay extra on your current mortgage. This allows you to still pay off a 30-year mortgage like a 15-year mortgage, but saves you closing costs you’d pay with a refi.
Refinance to avoid a balloon payment or to lock in a fixed-rate instead of an ARM
If you have an adjustable rate mortgage (ARM), increasing interest rates at the time your fixed rate expires may cause you to consider switching to a conventional mortgage loan with a locked in stable interest rate. Remember, with an ARM, interest rates may drop while market rates drop, but they also follow market trends when rates rise. Therefore, assuming you can find a good interest rate that works with your budget, this may be a great reason to refinance.
Likewise, approaching the end of a mortgage with a large balloon payment you aren’t prepared for financially may be a reason to refinance.
A cash-out refi to tap into home equity
A cash-out refi can be used to use the existing equity in your home to finance an improvement on your home or to use for another investment. While cash-out refis can be popular, especially as interest rates drop, be careful about resisting the temptation to take out money just because you can. Equity in your home offers stability, and you don’t want to use the equity you’ve built to finance an extravagant vacation or new and expensive car that you don’t need.
On the other hand, if you plan to do a cash-out refinance and use the funds for a capital improvement project on your house or property that will increase its value, that may be worth considering. Make sure you take into account the opportunity cost of the refinance with the closing costs versus utilizing alternative options to fund the project. You may want to consider saving up with your monthly budget and keeping that fund in a high-yield bank account to earn interest until you’re ready to move forward with the new back deck, kitchen remodel, or pool addition instead.
If you are considering a cash-out refinance to consolidate debt, such as student loan payments, we would urge you to consider other options, as it usually isn’t worth it. Instead, consider student loan refinancing, which doesn’t have the closing costs as refinancing your mortgage, and keeping your home equity can help protect one of your largest assets.
Common pitfalls and reasons to NOT refinance your mortgage
In the preceding section, we alluded to several situations where it may not make sense to refinance a mortgage. We want to highlight a few situations physicians on our communities don’t always factor in that could make a mortgage refinance a bad idea, even if the interest rate is better.
You don’t plan on staying in your home for much longer or you plan on paying off your mortgage soon
Remember, your breakeven point for the refinance costs matters. If you save $100 a month by refinancing, but plan on selling your house or paying off your mortgage in 2 years, and refinancing costs $4500, you have lost money by refinancing.
If the lower monthly payments on a monthly basis don’t translate to less money paid overall
While it’s true that refinancing to a lower interest rate can save you money on a monthly basis, you have to look at how much money you’ll pay over the course of the entire loan (including the closing costs) and decide if the extra money saved monthly is worth paying more in the long run, particularly in the scenario where you are extending the life of the loan.
The change in loan term doesn’t make sense for you
Remember that you have to set a new term with your new mortgage, and the mortgage lender you are working with will only have set options for this term. This term could make the new loan unaffordable or undesirable due to increased costs over the course of the loan.
For example, if you have a 30 year mortgage currently and are 4 years into it, you can’t have a new mortgage that’s underwritten to 26 years unless your mortgage lender offers that option. Instead, you may have to switch to another 30 year mortgage or to a 15 or 20 year mortgage. You may not be able to afford the payments associated with the shorter term mortgage.
Similarly, if you are further into a mortgage, you likely don’t want a new mortgage that’s a longer term, because you’ll pay more in interest over the course of the loan. Even if you can afford a shorter mortgage, if you’re close to paying it off, you may be better off just paying it off quicker and attacking the principal rather than paying closing costs. Again, the math matters.
A word of caution about ‘no cost’ refinancing
While many lenders sold physicians on the idea of a no cost refinance when interest rates were high, know that you may not have to pay closing costs, but they could roll those costs into the loan amount, charge a higher interest rate, or include points in the loan. Make sure that you run the actual number and shop around for other refinancing options before assuming that this is the best option.
TLDR: Calculate the breakeven point where refinancing a mortgage makes sense
The long and short of it is that you have to consider your personal situation, how long you plan on staying in the house, how long you plan to take to pay off your mortgage, and the closing costs when determining when refinancing makes sense.
If you are not planning on staying in the house for a long time or if you are planning on paying the mortgage off early, calculate the breakeven point, which is the point at which all of the costs associated with refinancing have been offset by your monthly savings from the mortgage. It is only after this point that you are actually saving money.
Where can I refinance my mortgage?
Many loan providers offer the ability to refinance, so you can start by reaching out to your current lender for information. They may not have the best current rates, however, as they know that this is the easiest pathway for you and may not be as incentivized to get your business. Therefore you should also shop around to see where you can get the best refinancing package that you qualify for.
PSG Resources and Perks: Contact our sponsor, Tom Raschka, NMLS 205578, who is a mortgage agent that specializes in assisting physicians with their mortgage refinancing needs. You can contact him here to explore refinancing today.
Conclusion
Refinancing your home mortgage can be a great way to reduce the cost of your mortgage over the length of your loan, especially if interest rates have dropped significantly. Spend the time to get a few different quotes to find the best available deal, then do the math with the mortgage amortization to make sure that you’ll save enough in interest payments to cover the cost to refinance.
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