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Maybe you’ve considered refinancing your mortgage, but haven’t quite decided. Is now the right time? Will rates go lower?

It can be hard to know when to take the plunge.

Whether you purchased a home recently or bought a home years ago, you probably know the average mortgage rates now are high compared to the near-historic lows in early 2021.

But as with any financial rate or data point, it is hard – if not impossible – to time the market or predict the future.

Homeowners often look to refinance when it could benefit them in some way, like with a lower monthly payment. Refinancing is the process of paying off a mortgage with new financing, ideally at a lower rate or with some other, more favorable, set of terms.

Here are seven signs that locking in a new mortgage could be the right move.

7 Signs It May Be Smart to Refinance Your Mortgage

You Can Break Even in Two Years or Less

Refinancing a mortgage costs money — generally 2% to 5% of the principal amount. So if you are refinancing to save money, you’ll likely want to run numbers to be sure the math checks out.

To calculate the break-even point on a mortgage refinance — when savings exceed costs — do this:

1.    Determine your monthly savings by subtracting your projected new monthly mortgage payment from your current monthly payment.

2.   Find your tax rate (e.g., 22%) and subtract it from 1 to get the after-tax percentage of the savings.

3.   Multiply monthly savings by the after-tax percentage. This is your after-tax savings.

4.   Take the total fees and closing costs of the new mortgage loan and divide that number by your monthly after-tax savings. This yields the number of months it will take to recover the costs of refinancing — or the break-even point.

For example, if you’re refinancing a $300,000, 30-year mortgage that has a fixed 7.50% rate to a 6.50% rate, refinancing will reduce your original monthly payment from $2,098 to $1,896 – a monthly savings of $202. Assuming a tax rate of 22%, the after-tax percentage would be 0.78, which results in an after-tax savings of $157.56. If you have $12,000 in refinancing costs, it will take about 76 months to recoup the costs of refinancing ($12,000 / $157.56 = 76.2).

The length of time you intend to own the home can affect whether refinancing is worth the expense. You’ll want to run the calculations to make sure that you can break even on a timeline that works for you. But two years is a general rule of thumb.

The rate and fees usually work in tandem. The lower the rate, the higher the cost. (“Buying down the rate” means paying an extra fee in the form of discount points. One point costs 1% of the mortgage amount and lowers your interest rate by 0.25%.)

If you’re shopping, each mortgage lender you apply with is required to give you a loan estimate within three days of your application, so you can compare terms and annual percentage rates. The APR, which includes the interest rate, points, and lender fees, reflects the true cost of borrowing.

2. You Can Reduce the Rate by at Least 0.50%

You may have heard conflicting ideas about when you should consider refinancing. The reason is that there is no one-size-fits-all answer; individual loan scenarios and goals differ.

One commonly cited rule of thumb is that the home refinance rate should be a minimum of two percentage points lower than an existing mortgage’s rate. What may work for each individual depends on things like loan amount, interest rate, fees, and more.

However, the combination of larger mortgages and lenders offering lower closing cost options has changed that. For a large mortgage, even a change of 0.50% could result in significant savings, especially if the homeowner can avoid or minimize lender fees.

If rates drop low enough, you might even choose to take a higher rate with a no closing cost refi.

Recommended: Guide to Buying, Selling, and Updating Your Home

3. You Can Afford to Refinance to a 15-Year Mortgage

When you refinance a loan, you are getting an entirely new loan with new terms. Depending on your eligibility, it is possible to adjust aspects of your loan beyond the interest rate, such as the loan’s term or the type of loan (fixed vs. adjustable).

If you’re looking to save major money over the duration of your mortgage loan, you may want to consider a shorter term, such as 15 years. Shortening the term of your mortgage from 30 years to 15 years will likely cost you more monthly, but it could save thousands in interest over the life of the loan.

For example, a 30-year $1 million loan at a 7.50% interest rate would carry a monthly payment of approximately $6,992 and a total cost of around $1,517,172 in interest over the life of the loan.

Refinancing to a 15-year mortgage with a 5.50% rate would result in a higher monthly payment, about $8,171, but the shorter maturity would result in total loan interest of around $470,750 -– an interest savings over the life of the loan of about $1,046,422 vs. the 30-year term.

One more perk: Lenders often charge a lower interest rate for a 15-year mortgage than for a 30-year home loan.

4. You’re Interested in Securing a Fixed Rate

Borrowers may take out an adjustable-rate mortgage because they may get a lower rate (at least initially) than on a fixed-rate mortgage for the same property. But just as the name states, the rate will adjust with market fluctuations.

Typically, ARMs for second mortgages such as home equity lines of credit are “pegged” to the prime rate, which generally moves in lockstep with the federal funds rate. First mortgage ARM rates are tied more closely to mortgage-backed securities or the 10-year Treasury note.

Even though ARM loans come with yearly and lifetime interest rate caps, if you believe that interest rates will move higher in the future and you plan to keep your loan for a while, you may want to consider a more stable fixed rate.

Refinancing to a fixed mortgage can protect your loan against rate increases in the future and provide the security of knowing how much you’ll be paying on your mortgage each month, no matter what the markets do.

5. You’re Considering an ARM

You may also be considering a move in the other direction—switching from a fixed-rate mortgage to an adjustable-rate mortgage. This could potentially make sense for someone with a 30-year fixed loan but who plans to leave their home much sooner.

For example, you could get a 7/1 ARM with a potential lower interest rate for the first seven years, after which the rate may change once a year, when up for review, as the market changes. If you plan to move on before higher rate changes, you could potentially save money.

It’s best to know exactly when the rate and payment will adjust, and how high. And it’s important to understand the loan’s margin, index, yearly and lifetime rate caps, and payments. For further details, try using an online mortgage calculator

6. You’re Considering a Strategic Cash-Out Refi

In addition to updating the rate and terms of a mortgage loan, it may be possible to do a cash-out refinance, when you take out a new loan at a higher loan amount by tapping into available equity.

The lender will provide you with cash and in exchange will increase your loan amount, which will likely result in a higher monthly payment.

If you go this route, realize that you’re taking on more debt and using the equity you have built up in your home. Market value changes may result in a loss of home value and equity. Also, a mortgage loan is secured by your home, which means that the lender can seize the property if you are unable to make mortgage payments.

A cash-out refi may make sense if you use it as a tool to pay less interest on your overall debt load. Using the cash from the refinance to pay off debts carrying higher rates, like credit cards, could be a good move.

Depending on loan terms and other factors, a lower rate may allow for overall faster repayment of your other debts.

Recommended: How Does Cash-Out Refinancing Work?

7. Your Financial Situation Has Improved

When putting together an offer for a mortgage, a lender will often take multiple factors into consideration. One of those is prevailing interest rates. Another is your financial situation, including things like your credit history, credit score, income, and debt-to-income ratio.

The better your personal financial situation in the eyes of the lender, the more creditworthy you are – and the better the terms of your loan offer could be.

Therefore, it may be possible to refinance your mortgage loan into better terms if your financial situation has improved since you took out the original loan, especially when paired with relatively low market rates.

The Takeaway

Is it time to refinance? It might be if you could get a lower interest rate or better loan term. For instance, locking in a lower rate now may help you achieve your long-term goals by freeing up cash for other stuff, like retirement or a big vacation.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

FAQ

How do you know if it’s the right time to refinance?

To see if now is a good time for you to refinance, you can calculate your break-even point – when your savings exceed your costs. You can do this by dividing the total closing cost amount by the net monthly savings you’d get from the refinance. This will give you the number of months it will take to pay off the closing costs and let you know where the break-even point is.

What is the timeline for refinancing?

Refinancing typically takes between 30 and 45 days, though it can vary. Being prepared with relevant documents and responsive to requests can expedite the process.

How long after signing a mortgage can you refinance?

The length of time required after you sign a mortgage to when you can refinance can vary based on the type of loan. For conventional loans backed by Fannie Mae or Freddie Mac, you may be able to refinance immediately. However, there may be a “seasoning period” of six months required by your lender before you can refinance with that lender. FHA loans have a waiting period of 210 days to 12 months; VA loans require 210 days or six on-time payments, whichever comes later; and USDA loans can be refinanced after 12 months of on-time payments. Jumbo loan terms are set by the lender.

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Exchange-traded funds, or ETFs, are popular investment vehicles, and while they may generate returns for investors, they can also offer certain tax advantages. That’s particularly true when comparing ETFs to other, similar investment types, such as mutual funds.

That does not, however, mean that there are some critical things to know about tax efficiency and ETFs. There are a lot of factors and variables to take into consideration when devising your investment strategy, so it’s worth knowing the details about what makes an ETF advantageous, in some cases, for tax reasons over mutual funds.

ETFs & Mutual Funds: How They Differ

When it comes to understanding ETFs vs mutual funds, it’s often best to start with a simple explanation for each.

Both mutual funds and ETFs invest in a group or “basket” of underlying stocks, bonds, commodities, and other financial assets, on behalf of fund shareholders. But ETFs trade on a daily basis, much like stocks and bonds. Mutual funds do not.

Mutual funds offer investors a menu of various share classes where they can invest their money. Given the wider selection of assets available, a mutual fund investor may see more fund fees to compensate for that expanded menu. Given their low trading structure, ETF fees are usually lower than those of mutual funds, often resulting in a lower expense ratio.

ETF Tax Advantages Over Mutual Funds

Tax-wise, the IRS treats ETFs and mutual funds the same. When an investor who owns either fund type sells securities that have appreciated in value, it creates a capital gain — or capital appreciation on the investment — which is taxable under U.S. law. The same is true if they’re selling at a loss as well — selling the asset triggers a taxable event.

ETF fund managers make trades for a variety of reasons. For example, an asset can be bought and sold for strategic reasons (i.e., to properly allocate assets or to avoid “style drift” when a fund slides away from its target strategy). Trades also must be made upon shareholder redemptions — when they redeem some or all of the assets they’ve invested in the fund.

The more trades made by ETF fund managers, the more taxable events occur. Consequently, for fund managers and investors, the goal is to find ways to keep those taxes from accumulating.

An ETF’s structure can help curb the negative impact of taxes in the following ways.

Lower Capital Gains Impact

Since the IRS considers capital gains a taxable event, a major goal with any fund investment is to reduce the impact of capital gain payouts to shareholders at year-end.

ETFs typically accumulate fewer capital gains than mutual funds. When a mutual fund has to redeem assets back to shareholders, it must sell assets to create the money needed to pay out those redemptions, resulting in capital gains. But when an ETF shareholder wants to sell shares, they can easily do so by trading the ETF to another investor, just like a stock transaction. That, in turn, creates no capital gains impact for the ETF, and adds a major tax advantage for ETF investors.

Index Tracking Tax Benefits

Since many ETFs are structured to track a particular index, trades are made only when there are changes in the underlying index (like when the S&P 500 or the Russell 2000 index experience significant fluctuations that require some ETF stabilization). Fewer transactions generally means lower taxes.

The Use of “Creation Units”

ETFs are built to trade differently than mutual funds. With ETFs, fund managers can leverage so-called “creation units” — blocks of shares — to buy and sell fund securities. These units enable fund managers to buy or sell assets collectively, instead of individually. That means fewer trades and fewer taxable trade execution events.

Downsides of ETFs and Taxes

Though ETF tax efficiency is generally better than that of mutual funds, that doesn’t mean ETFs come with no tax risks. There are a few taxable events that bear watching for investors.

Distributions and Dividends

Just like any investment vehicle, ETFs can come with regular distributions and dividends, which are usually taxable.

Increased Trade Activity on Actively Managed Funds

Though most ETFs simply follow an investment index, there are some actively managed ETFs. With actively managed funds, more trades are made, which may lead directly to a more onerous tax bill.

Trading Costs

Since ETFs are traded like stocks, the fees that come with buying and selling ETF assets usually trigger trading costs that are akin to trading stocks, and those fees can be high. Historically, brokerage trading fees are among the highest fees in the investment industry, which isn’t great news for ETF investors. Even if investors do save on taxes, those savings can potentially be mitigated or even wiped out by high ETF trading costs.

The Takeaway

Exchange-traded funds offer ample potential tax benefits to savings-minded investors, especially in key areas like capital gains, expense ratios, redemptions, and trading frequency. That does not mean there aren’t potential downsides, however, that could include taxable dividends or distributions, higher potential trading costs, and more.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What are the advantages of ETFs over mutual funds?

While similar, ETFs tend to have lower associated fees than mutual funds, and depending on their structure, ETFs may also yield specific tax advantages, too.

What are the differences between ETFs and mutual funds?

Both mutual funds and ETFs invest in a group or “basket” of underlying stocks, bonds, commodities, and other financial assets, on behalf of fund shareholders. But ETFs trade on a daily basis, much like stocks and bonds. Mutual funds do not, and tend to offer investors a wider variety of investing options–in addition to higher fees.

What are some potential tax-related disadvantages of ETFs compared to mutual funds?

Potential tax-related disadvantages of ETFs, as they relate to mutual funds, can include taxable distributions and dividends, higher tax liabilities related to more trading activity, and potentially, higher trading costs.