Refinancing your mortgage at the right time could help you reduce the total amount of interest that you pay over the life of the loan.

When you refinance your mortgage, you are essentially applying for a new mortgage with a different interest rate, term and monthly payment. Here are four common reasons homeowners decide to refinance and what you should consider before starting the process.

1. Lower your monthly mortgage payment

Even the slightest difference in your mortgage rate can impact your monthly payment. The following example shows the dollar amount different when refinancing a $200,000 outstanding loan balance into a 30-year fixed-rate mortgage at various rates.

Mortgage Rate

3.15%

3.29%

3.36%

3.65%

3.75%

Monthly Mortgage Payment (P&I)

$859

$875

$883

$915

$926

If you refinance to a lower interest rate, your monthly payment will likely shrink. You can put those savings toward other expenses or apply it toward your principal balance, which will help you to pay off your loan sooner.

2. Pay off your loan sooner

A 30-year term may have made the most financial sense at the time you took out your mortgage, but if your financial situation has improved, securing a shorter-term loan, like a 15-year mortgage, will allow you to build equity faster and own your home sooner.

3. Save on total interest

The interest rate and the mortgage term, together, determine how much total interest you'll pay over the life of your loan. By reducing one or both of these factors, you could be saving a significant amount on interest in the long run.

4. Switch mortgage types

With a fixed-rate mortgage, your interest rate is locked in for the life of the loan, so you have the stability of consistent monthly payments that won't increase. If the interest rate on your adjustable rate mortgage (ARM) is adjusting upwards, it may be time to convert to a fixed-rate mortgage. On the other hand, switching to an ARM could make sense, if you plan to move before the fixed rate period on the loan ends.

What to consider before you refinance

Current interest rates – If you're refinancing, you'll want to get the best rate possible. As the example above shows, small changes in rates can have a big impact. It's recommended that you interview several lenders and compare rates and terms. You may decide to refinance with your current lender or find a new lender with an option more suited to your situation.

Cost of refinancing – The closing costs on a refinance are going to be similar to what you paid when you purchased your home and will include the same services and fees (for instance, loan origination fee, underwriting fees, title services, and more). So, if there's a chance you may move before you recoup the costs, refinancing now may not make financial sense.

A great resource is Freddie Mac's refinancing costs calculator, which helps estimate the costs of refinancing your mortgage.

Mortgage term – Refinancing to lower your interest rate can save you money, but if your mortgage is nearing the end of its life, getting a new mortgage with a new term may not make financial sense. For instance, if you have 20 years left on your 30-year fixed-rate mortgage and you refinance into a 30-year fixed-rate mortgage, you've essentially extended the term of your loan. As a result, you could actually end up paying more interest over the life of the loan.

Is 2021 a good time to refinance my mortgage?

As a general rule, you should refinance if and when it makes sense for your finances. With today's mortgage interest rates near all-time lows, refinancing now could lower your monthly mortgage payment and save you money in the short and long-term.

Source: @FreddieMac.com