Should You Refinance Your Mortgage or Downsize Your Home?

Looking at ways to cut costs in your monthly spending so you have more for things like retirement savings, college funds, travel, and more? The answer may be right in front of you, or rather, all around you. We’re talking about your house— and the decision to refinance or downsize.

If done right, refinancing can lower your monthly mortgage payments or help you pay off your loan ahead of schedule. Downsizing can put money in your pocket and reduce your overall housing expenses. So which one is right for you?

As with everything in life, the first step towards the right decision is having all the information to weigh your options. With the help of Pedro Torres, Mortgage Loan Originator at Amplify Credit Union, we’ve broken down what you need to know about refinancing and downsizing, including when these choices make the most sense.

When to Refinance Your Mortgage

Refinancing replaces your current mortgage with a new loan, potentially giving you different terms, a new interest rate, or a different monthly payment. Here’s when to consider this option.

1. You want to stay in your current home.

Start here. If your home still works well for your family, location, and lifestyle, moving simply to change your housing expenses may feel like an unnecessarily big step. Refinancing allows you to keep the home while restructuring the financing behind it.

“This should be the first question you ask yourself if you are weighing refinancing vs. downsizing,” Torres says. “If you want to stay in your home, it’s worth taking a harder look at refinancing and whether it would allow you to achieve your financial goals.” 

2. Your financial goals have changed.

Many homeowners associate refinancing with getting a lower interest rate, but that isn’t the only possible goal. Depending on your situation, you might refinance to change the length of your loan, move from one mortgage type to another, or adjust your monthly payment.

For example, you may have prioritized the lowest possible monthly payment back when you first bought the house. Now, your goal may have shifted to paying off your mortgage faster. Or perhaps you’re looking for more room in the monthly budget and a longer-term financing strategy.

The bottom line? Your mortgage should be evaluated in the context of your current goals rather than the goals you had when you originally bought the home.

3. You can improve your loan terms enough to justify the cost.

One important consideration is your break-even point, which is the point at which the savings generated by the new mortgage have made up for the upfront expenses. Refinancing comes with closing costs, so even a mortgage that looks better on paper isn’t automatically the less expensive option.

For example, imagine a refinance with closing costs of $6,000 that lowers your monthly mortgage payment by $250. 

$6,000 ÷ $250 = 24 months

In this simplified example, it would take about two years for the monthly savings to equal the cost of refinancing.

“If you’re considering refinancing, how long you plan to stay in the home matters. You want to understand how much the new loan will cost, what you’re gaining from it, and whether you’ll be in the home long enough for those numbers to make sense,” Torres explains.

When Refinancing Won’t Solve the Problem

Sometimes the mortgage isn’t the main reason a home feels expensive. Property taxes, homeowners insurance, utilities, HOA dues, repairs, and routine maintenance can all make up a significant portion of your overall housing costs. Refinancing generally won’t make those expenses disappear.

If your mortgage payment is manageable but the cost of maintaining the entire property is stretching your budget, it may be time to look beyond the loan. 

That’s where downsizing enters the conversation.

When to Downsize Your Home

Downsizing doesn’t necessarily mean moving into a tiny home. It simply means moving into a home that better matches your current needs, which could mean less square footage, a lower purchase price, a smaller yard, or fewer ongoing expenses.

1. Your overall housing costs are too high.

Mortgage payments are only one part of homeownership.

A smaller or less expensive property could potentially reduce several expenses at once, including property taxes, homeowners insurance, utilities, maintenance, and repairs.

That distinction matters. If the goal is to significantly lower the total amount you’re spending on housing, downsizing could have a larger impact than adjusting the mortgage alone.

2. You have more house than you actually need.

A home that once made perfect sense can become more space than you want to maintain.

Maybe children have moved out or you no longer use a large yard, extra bedrooms, or other features you once considered essential. Or you may simply decide that you’d rather spend less time and money maintaining your home.

In that situation, downsizing can be as much of a lifestyle choice as a financial one.

3. You have substantial equity in your current home.

If you’ve owned your home for several years, you may have built significant equity. When you sell, some of that equity may be available to put toward your next home after paying off your existing mortgage and accounting for the costs of selling.

Depending on your finances and the price of your next property, that could allow you to make a larger down payment, take out a smaller mortgage, or potentially purchase the next home without financing.

4. Your lifestyle is changing anyway.

Sometimes the question isn’t whether you’ll move, but when.

Retirement, relocating, living closer to family, or wanting a lower-maintenance home may already be part of your plans. If that’s the case, refinancing a home you expect to leave relatively soon may not make financial sense, especially if you won’t reach your break-even point first.

When Downsizing Won’t Solve the Problem

A smaller home isn’t automatically a cheaper one.

Suppose you sell a larger home in one neighborhood and purchase a smaller property in an area with higher home prices, property taxes, or HOA dues. Your new home may have less square footage without producing much financial savings.

You also have to account for the transaction itself. Selling and buying can involve closing costs, moving expenses, inspections, repairs, and other expenses. Before assuming downsizing will lower your monthly costs, compare the full cost of owning your current home with the full cost of the property you’re considering.

5 Questions to Ask Before You Refinance Mortgage or Downsize

If you’re stuck between refinancing and downsizing, ask yourself:

• Is the problem my mortgage or my overall cost of homeownership? If you’re mainly unhappy with your loan terms, refinancing may help. If taxes, insurance, utilities, maintenance, and other housing costs are also stretching your budget, downsizing may be worth considering.
• How long do I want to stay in this home? If you expect to move soon, you may not stay long enough to recoup the closing costs of a refinance.
• How much would each option actually save me? Compare the potential savings from a refinance with the total cost of owning a smaller or less expensive home.
• What will each option cost upfront? Refinancing typically comes with closing costs, while downsizing can involve selling costs, buying costs, and moving expenses.
• Which choice fits the life I want several years from now? Consider how much space you want, where you want to live, and how much maintenance you’re comfortable taking on, not just which option produces the lowest monthly payment.

“Refinancing and downsizing can both make sense, but they solve different problems,” Torres explains. “The goal is to look beyond the monthly payment and think about which option fits your budget, your timeline, and how you actually want to live in the home.”

The Bottom Line: Downsize or Refinance?

Refinancing may make more sense when you want to stay in your current home but believe your mortgage could better support your financial goals. Downsizing may be worth considering when the home itself has become more expensive, spacious, or demanding than you want it to be.

You don’t have to figure out the mortgage side of that equation alone. A local mortgage lender can help you review your existing loan, explore refinancing options, and understand what financing could look like if you decide to move instead.

This article was first published on May 24, 2021.