When to Refinance a Mortgage

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• Mortgage rates are still high for many borrowers, meaning it might not be the best time to refinance.
• Refinancing can be beneficial if it helps you save money each month. But beware of long-term costs.
• If you plan to move before you're able to break even on your closing costs, refinancing probably isn't worth it.

The mortgage refinancing process can be laborious and expensive — but if the conditions are right, it can be worth it in the long run. Before jumping in, you want to make sure you're refinancing for the right reasons.

There are many different reasons homeowners refinance their mortgages, from wanting to lower their monthly payments to taking equity out to finance a high-cost home repair. Here's what borrowers should know about how the mortgage refinance process works and when you might want to consider refinancing your mortgage.

Should I refinance my mortgage now?

The answer to this question usually depends on current mortgage market conditions. Generally speaking, now isn't an ideal time for most borrowers to refinance, because rates are still higher than what most borrowers are paying. Fortunately, mortgage rates are likely to go down in 2024 . So you may get an opportunity to refinance later in the year.

Borrowers with rates that are higher than current mortgage refinance rates may benefit from refinancing now.

If you're in need of cash to reinvest in your home or consolidate high-interest debt, a cash-out refinance could make sense, since homeowners have gained a lot of equity over the past couple of years thanks to rapidly increasing home values.

But be sure to consider the big picture — if you're taking on a larger monthly payment or a higher rate, you might be better served seeing what kind of offers you can get from some of the best HELOC lenders .

Understanding mortgage refinancing

Definition of mortgage refinancing

The process of mortgage refinancing involves replacing your current mortgage with a new one. The new mortgage may have a different rate or term length than your previous mortgage. It may even be a completely different type of mortgage .

How refinancing works

To refinance your mortgage, you'll go through essentially the same process you went through when you got your original mortgage to purchase your home. This means you'll work with a mortgage lender to apply and get approved for a loan.

Optimal times to refinance

When interest rates drop

Mortgage refinance applications increase whenever mortgage rates start heading down. This is because your mortgage rate directly impacts your monthly mortgage payment . If you can snag a lower rate, your payment could go down significantly, giving you space in your monthly budget for other needs or wants.

Keep an eye on average mortgage rates to see if refinancing into a lower rate is possible for you.

Changes in your credit score

If your credit score is significantly better now than it was when you originally got your mortgage, you might be able to get a better mortgage rate if current rates are similar to or lower than the rate you're paying.

But if rates are higher now than when you got your current mortgage, even an excellent credit score likely won't be enough to help you get a lower rate.

Switching mortgage types

Refinancing to switch the type of mortgage you have isn't always a good idea, but there are a few scenarios where it can make sense.

Maybe your initial mortgage was an adjustable-rate mortgage , which keeps your rate the same for the first few years, then changes it periodically.

If your ARM's intro period is almost up and your rate will soon adjust to a higher rate, it could be a smart move to refinance into a fixed-rate mortgage , so you don't have to worry about your monthly payment increasing.

You might also consider refinancing to a conventional mortgage if you have a decent amount of equity in your home and want to get rid of FHA mortgage insurance.

You have a lot of equity

If your home has gained value since you bought it, you might be considering a cash-out refinance. With this type of refinance, you take out a loan larger than the amount you still owe, and you receive a portion of your home's gained value in cash.

Financial considerations

Analyzing your current financial situation

Your credit score and debt-to-income ratio play a big part in what interest rate you get. A higher credit score and lower DTI ratio typically result in a better rate. If your credit isn't in the best shape, you could end up with worse terms than what you have on your current mortgage.

Understanding refinancing costs

Average refinance closing costs vary depending on where you're located, your mortgage lender, and the type of loan you're getting, but generally you can expect to pay at least a couple thousand dollars.

Benefits of refinancing

Lower monthly payments

You can lower your monthly payment by refinancing into a lower rate or a longer term.

When rates are lower, refinancing can be a great way to lower your monthly housing costs. You may also be able to lower your monthly payment by refinancing into a longer term. For example, if you have 20 years left on your current mortgage and you refinance into a 30-year loan, your monthly payment should go down.

Keep in mind, though, that refinancing into a longer term will overall cost a lot more in interest. But if you're struggling to keep up with your current payment amount, this can be a good strategy to help you avoid foreclosure .

Shortening your loan term

Do you want to pay off your mortgage early and save on interest? Refinancing into a shorter-term mortgage could be a good way to do it.

Maybe you have 25 years left on your mortgage, but you want to do a 15-year mortgage refinance . Doing so will shave 10 years off your mortgage. You'll pay a lot less on the loan overall because you'll be paying interest for a shorter amount of time. If you can get a lower rate, you'll save even more.

Consolidating debt or paying for a home improvement project

The money you get from a cash-out refinance can be used however you like. Some common ways borrowers use these funds is to consolidate high-interest debt or to put money back into the home by completing home renovations or repairs.

Removing mortgage insurance

FHA loan borrowers are typically required to pay for mortgage insurance for the life of the loan. But if you have at least 20% equity in your home, you can refinance into a conventional loan with no mortgage insurance, potentially lowering your monthly payment.

Conventional loans only require private mortgage insurance until you reach 20% equity. Once you reach this point, you can ask your lender to cancel it. Otherwise, the lender will typically cancel it automatically when you reach 22% equity.

Getting rid of mortgage insurance by itself might not be the best reason to refinance, because you could pay more in fees and interest than you would save on your monthly payments.

Mortgage refinance savings example

How can refinancing your mortgage save you money? Let's take a look at an example.

Say you bought your house five years ago with a $300,000 30-year fixed-rate mortgage. Your rate is 5% and you pay $1,610 each month. Currently, you still owe $260,000 on your mortgage, and you're considering refinancing into a new 30-year loan at a 4% rate. Is it worth it?

If you continued with your current mortgage for the remaining 25 years, you'd ultimately pay $279,767 in interest.

If you refinance into a 30-year mortgage with a 4% rate, your new mortgage payment would be $1,241, putting nearly $370 back into your monthly budget. You'd also end up saving on interest over the long term, paying $186,860 over the life of the loan.

This means refinancing would save you almost $370 each month, as well as $92,907 in interest over the life of the loan.

Keep in mind, though, that you'll also pay closing costs on this new loan. Paying closing costs mean it will take some time for you to break even on your refinance.

With closing costs equal to 3% of the $260,000 loan amount, you'd pay $7,800 at closing. You can determine how long it will take you to break even by dividing the amount you pay in closing costs by the amount you're saving on your monthly payment.

In this example, it would take you around 21 months to break even on your refinance (7,800 ÷ 370 = 21.08). This means that if you plan to sell your home within this time, refinancing might not be worth it, because you'll end up spending more than you save.

Risks and drawbacks

Because it costs money, you should think carefully about your reasons for wanting to refinance. Many times, refinancing just isn't worth it.

Potential for higher long-term costs

If you're lengthening your term or borrowing more than what you currently owe, a refinance will cost you more in the long run in interest.

Fees and penalties

All refinances come with closing costs, whether they're paid up front or rolled into the loan amount. Additionally, if your current mortgage comes with a prepayment penalty, you'll likely have to pay that to be able to refinance.

Moving before you break even

As we saw in the example above, refinancing can end up costing more than what you save if you don't stay in the home long enough to hit your break-even point.

Rates aren't much lower

Many experts advise borrowers to only refinance if they can drop their rate by a percentage point or more. If you're only saving a little bit each month with your new mortgage, it will take a long time to break even on your closing costs.

There might be better alternatives

A cash-out refinance can be a useful financial tool if you need a large amount of money to pay for something that will benefit you, like a value-boosting home upgrade. But it's not the only tool at your disposal. A HELOC, home equity loan , or even unsecured options like a personal loan or credit card could be cheaper, safer alternatives, depending on your situation.

How to prepare for refinancing

Evaluating your home's equity

Your equity is the difference between what your home is worth and what you owe on your mortgage. Depending on your lender, you may need to keep at least 20% equity in your home to qualify for a cash-out refinance. Requirements may be lower for a standard refinance with no cash out.

Shopping for the best refinancing rates

You don't have to refinance with your current lender. Be sure to shop around and compare two or three different lenders to find the best mortgage refinance lender for you.

Preparing financial documentation

If you're getting a conventional refinance, your lender will likely ask for documentation that shows your income and assets, like paystubs, W2s, tax returns, and bank statements. It will also want information on your current loan, your property taxes, and your homeowners insurance .

If you're doing a streamline refinance , you may not have to provide as much information on your current financial situation. Streamline refinances are only available on government-backed mortgages.

Refinancing strategies

Cash-out refinance

If you need cash and you have a decent amount of equity in your home, you can take some of it out with a cash-out refinance. This can be a smart financial strategy for borrowing money since mortgage rates are generally much lower than other types of loans.

But by tying the money you need to borrow to your home loan, you risk foreclosure if you aren't able to keep up with those payments.

No-closing-cost refinance

A no-closing-cost refinance does come with closing costs, but instead of paying them at closing, your lender will either roll them into your loan amount or charge you a higher interest rate to compensate. Though you'll save up front, you'll pay more in interest over the life of the loan.

Refinance to fixed or adjustable rate

Refinancing to a fixed rate will provide more stability, since you won't have to worry about your payment increasing significantly down the road.

It's less common to refinance from a fixed rate to an adjustable rate, but it's possible if you want to take advantage of lower rates. Just be aware that you could end up with an even higher monthly payment in a few years.

When to refinance mortgage FAQs

How do I know if refinancing will save me money?

Refinancing will only save you money if you stay in the home long enough to recoup the money you spent in closing costs for the new loan. Divide your total closing costs by the amount you'll save on your payment each month to find out how long you'll need to remain in the home.

At what point is it worth it to refinance?

Experts typically recommend that you wait to refinance until mortgage rates are at least a full percentage point below your current rate.

Can I refinance with a poor credit score?

Refinancing with a poor credit score could result in a higher rate, defeating the purpose of refinancing. However, if you're getting a streamline refinance that doesn't require a credit check, you don't need to worry about having a bad score.

Should I choose a fixed-rate or adjustable-rate mortgage when refinancing?

Fixed-rate mortgages are extremely popular due to their predictability, since your rate will stay the same throughout the life of the loan. Many borrowers who start with an adjustable-rate mortgage end up refinancing into a fixed-rate loan.

How long should I wait to refinance my mortgage?

Often, you don't have to wait to refinance. Whether or not you should wait depends on where rates are currently compared to the rate you're paying, and where they might go in the near future.

How do I know when I can refinance my mortgage?

If you have a conventional mortgage, you can generally refinance right away. Some lenders require you to wait at least six months, but you can refinance with a different lender if you don't want to wait. The exception is if you're trying to do a cash-out refinance; with that, you'll have to wait at least six months. With other types of mortgages, such as FHA mortgages, you may be required to wait between six to 12 months before refinancing.

What is a cash-out refinance, and how does it work?

A cash-out refinance lets you take equity out of your home. It works by replacing your current mortgage with a new, larger loan. The new mortgage pays off your existing loan, and you'll pocket the remaining funds.

Should I refinance in 2024 or 2025?

As rates drop, it could be worth it to refinance later in 2024 or in 2025. But it depends on how much they drop, and what your current rate is.