As the COVID-19 pandemic continues, mortgage rates are at the lowest they’ve ever been. For people who find themselves employed and in solid financial shape, this offers an unprecedented opportunity to refinance their mortgage, locking in savings for years to come.

Americans are responding in large numbers. Refinance activity is more than double what it was last year, according to the Mortgage Bankers Association. 

Low rates aren’t the only reason to refinance. But watch out: There are plenty of other factors that could make a refinance a bad idea right now. We’ll explore both scenarios.

4 reasons to refinance your mortgage

Rates are at historic lows

With businesses at a standstill and the federal government injecting trillions of dollars into the economy, mortgage rates continue to sink to historic lows. By early July, the average 30-year fixed mortgage rate had fallen to 3.26%, according to the Mortgage Bankers Association, down more than half a percentage point in just three months. 

These historically low rates make it more likely that you can lock in a significantly lower rate by refinancing.

Even though rates are low across the board, be sure to take your time. With lenders competing for business, it can be helpful to get multiple rate quotes. In many parts of the country, you could be able to save tens of thousands of dollars over the life of your loan by shopping around.

You may be able to eliminate mortgage insurance

Mortgage insurance is required on a number of different types of loans. It is intended to protect the lender in case you fail to make your monthly payments, lowering their risk in making the loan. It’s commonly included as a monthly payment added to your mortgage.

For conventional loans, private mortgage insurance (PMI) is typically required until you hit 20% equity in the home. Your equity is also expressed as your loan-to-value (LTV) ratio, or the measure of how much you owe on your mortgage versus your home’s market value.

Once you hit 20% equity in your home, you can request to have your PMI cancelled or you can refinance to a loan without PMI. So if you’ve recently achieved a LTV ratio of 80%, it might be a good time to consider a refinance.

You have an adjustable rate mortgage

If you have an adjustable rate mortgage (ARM), the amount you pay fluctuates over time. It can go up or down, based on the market. With interest rates so low, your payment on an adjustable rate mortgage is likely pretty reasonable right now. But when rates inevitably rise in the future, so will your payment. 

Now could be a good time to refinance into a fixed-rate mortgage at today’s rock-bottom interest rates so your payment won’t change moving forward. That’s especially true if you’re in a solid financial position right now – there’s no guarantee you’ll still be able to refinance when rates start to rise.

You need to access cash

If you need cash for a home renovation project or other major expense, you may be able to complete a “cash-out” refinance if you have enough equity in your home. In a cash-out refinance, your new mortgage is for a larger amount than you currently owe, with the difference coming to you as cash.

5 reasons refinancing might not be right for you

Even though refinancing your mortgage seems like a great option right now, it won’t make sense for everyone. Here are a few scenarios in which you might want to take a pass.

You can’t afford closing costs

When you refinance your mortgage, you’ll be required to pay closing costs that can reach thousands of dollars. It’s not unusual to pay between 3% and 6% of your current balance at closing, according to the National Credit Union Administration (NCUA). If you owe $200,000 on your mortgage, that can amount to $6,000 to $12,000. If you don’t have that kind of cash, you might consider passing on a refinance. 

But even if you do have the money on hand, you’ll want to make sure you’re still getting a good deal after taking into account the closing costs. You can use an online refinance calculator to determine when you’ll “break even” on your costs, weighing your monthly savings against the cash you pay up-front. Depending on your current interest rate, this can be months or even years.

Also keep in mind: Some lenders advertise a no-cost closing, but they typically require you to pay a higher interest rate.

You’re planning to move soon

The length of time it takes to break even on your refinance comes into play especially if you’re planning to sell your home or move in the near future. If you expect to move before you recoup your closing costs through monthly savings on your refinance, it would be wise to hold off.

You just refinanced

There are no laws about how often you can refinance your mortgage, but it might not always make sense to refinance again if you’ve just closed on one. Another refinance means another set of closing costs. 

Some loan programs also have waiting periods between refinances. For example, cash-out refinances often require you to have held the loan for six months before refinance.

Your mortgage has a prepayment penalty

Some lenders insert prepayment penalties into their mortgages, which require you to pay a fee if you pay off your loan early, including through a refinance. You’ll need to include this fee into your closing cost break-even calculation to see if your refinance is a good deal. You may be able to get your lender to waive the pre-payment penalty if you use their company to refinance.

You’re near the end of your mortgage

The amount you pay toward principal versus interest changes over the life of your mortgage. At the beginning, you tend to pay more in interest. At the end, you're paying mostly principal. If you refinance your mortgage, you restart that clock and go back to paying mostly interest again – meaning you’re building equity more slowly.