Time to refinance?

Interest rates are poised to rise soon, so if you're considering refinancing your mortgage, you might want to act quickly.

Refinancing involves getting a new mortgage, which pays off your previous loan and leaves you with new, typically lower, monthly payments to make. A rule of thumb is that when prevailing interest rates are at least a percentage point lower than the current rate on your mortgage (such as 4.25% vs. 5.25%), it's worth looking into whether refinancing is a good move for you.

You can refinance through your current lender, and that can make the process easier — but you don't have to. Shop around to see which lender will offer you the best rate.

One option is to take another kind of loan. For example, if you have a 30year mortgage, you might refinance into a 15-year one in order to pay off the loan sooner and pay less in total interest. Payments are higher with shorter-term loans, but if interest rates have fallen, they might not be too much higher than what you were paying.

Refinancing isn't free — as you'll be taking on a new home loan, there will be closing costs and other fees to be paid. Make sure that you plan to stay in the home at least long enough for the total cost of refinancing to be worth it. For example, if refinancing costs $3,000 and your monthly payments will be $200 lower, divide $3,000 by $200 and you'll get 15, which means you'll break even in 15 months.

Some people pursue a “cash-out” refinancing, where they take out a new loan for more than they owe on their home. That gives them extra cash, which they may need or want. But be careful with cash-outs, because a bigger loan can mean bigger monthly payments — and if home values fall, you might end up owing more than your home is worth, which can make it harder to sell.

Learn more about mortgages at our sister sites, TheAscent.com and Millionacres.com.