When should you refinance your mortgage?

With mortgage rates still higher than in recent years, the question of whether it’s worth it to refinance your mortgage may come down to targeted savings, not major rate drops.

Here’s how to figure out if refinancing is a good idea — and when you may want to stay the course with your current loan.

When should you refinance your mortgage?

For many borrowers, refinancing makes sense when you can lower your interest rate and your monthly payment.

“The market for refinancers is relatively small right now, focused mostly on people who bought in 2023-25 and have fixed rates ranging from the high 6’s to low 8’s,” says Ted Rossman, principal analyst at Bankrate. 

Do the legwork necessary to secure the best rate possible. 

“This means shopping around with at least three lenders and exploring various options,” says Stephen Kates, Bankrate financial analyst. “Go into the process with as strong a credit profile as possible. The stronger your borrowing profile, the better your terms are likely to be. Make sure to compare quotes using the annual percentage rate (APR), since this metric includes fees and points. Do not rush or allow yourself to be pressured into deciding before you are comfortable. This is a major decision and should be made with a clear head.”

Aside from interest rate drops, there are other factors to consider when weighing a refinance:

• Refinance closing costs 
• Your monthly savings 
• Amount of time you plan to live in your home

Example: Should I refinance my mortgage?

Suppose you take out a 30-year mortgage for $320,000 at a 6.50% fixed rate. Your monthly payment is $2,022, and over the life of the loan, you’ll pay $727,920 — including $407,920 in interest.

Five years later, rates drop to 6% and your remaining principal balance is $297,450. Refinancing into another 30-year loan at that lower rate would reduce your monthly payment to around $1,783, saving you about $239 a month. However, while the new loan would total $344,700 in interest, that doesn’t include the $96,900 you’ve already paid. In fact, you’d pay over $33,700 more in interest over the life of the new loan. In this scenario, refinancing wouldn’t make much of a difference overall. 

To save more on total interest, consider refinancing to a shorter term, such as a 25-year loan. You’d still save money each month compared to your current payment, and you could cut nearly $33,400 from your overall interest costs.

However, don’t forget that the total amount you can save by refinancing depends on several factors beyond rate, including your closing costs and whether you’ve chosen the right kind of refinance for your needs.

You won’t begin to realize savings until you reach the break-even point: when the amount that you save exceeds the closing costs. “It’s a simple calculation to determine whether the process is worthwhile,” says Kates. “Divide the total closing costs by your monthly savings to estimate how many months it will take before you are saving money on your mortgage payments, net of all costs.”

Using the 30-year refinance example above, say your refinance closing costs total $6,000. To determine the break-even point, divide the closing costs by the amount you’ll save each month with your new payment.

If you don’t plan to stay in your home that long, refinancing might not make sense.

Reasons to refinance your mortgage

Here are some key factors to help you know when to refinance a mortgage:

1. You want to lower the interest rate

If mortgage rates have fallen since you took out your loan, a rate-and-term refinance could help you secure a lower rate if you qualify. As a general rule, refinancing makes sense when you can reduce your rate by one-half to three-quarters of a percentage point. “The rate needs to be low enough that the savings will make up for the upfront refinance costs within about 24 months,” says Kates.

You may also qualify for a better rate if your credit score has improved. Borrowers with scores around 780 or higher typically receive the lowest available rates.

2. You’re able to shorten the loan term

You can also refinance to shorten the time it takes to repay your loan. If you have a 30-year mortgage, for example, you might want to refinance to a new 15-year mortgage. Ideally, you’d get a lower interest rate and lower monthly payments with the new loan, but it depends on prevailing rates and your remaining loan balance.

3. You want to change the rate structure

Along with lowering the rate or shortening the term, some borrowers refinance from an adjustable-rate mortgage (ARM) to a fixed-rate loan. A fixed rate makes your monthly payment consistent, which can be easier on your budget. On the flip side, switching a fixed-rate loan to an ARM might allow for lower payments until the rate adjusts.

4. You plan to pay for large expenses

You can use a cash-out refinance to tap your home’s equity for cash. You can use these funds for any purpose, such as:

• Reducing or eliminating high-interest debt
• Renovating your home
• Paying college tuition
• Investing in property

5. You wish to eliminate your private mortgage insurance (PMI)

If you have a conventional loan and your home’s value has risen, refinancing could help you eliminate private mortgage insurance (PMI) sooner than scheduled. And if you have an FHA loan with at least 20% equity, refinancing into a conventional loan can remove mortgage insurance altogether.

6. You need to change the home’s ownership

If you need to change the people who are responsible for the mortgage — for example, if you’re divorcing and one of you intends to keep the home — refinancing may be your best option. Keep in mind that whoever remains in the home will need to qualify for the mortgage with their finances alone.

When you should not refinance

Refinancing may not always be the right move. You may want to hold off if:

• You’d pay more in interest. If current rates are higher than your existing rate, or your credit profile won’t qualify you for a better loan, refinancing likely won’t make sense.
• You plan to sell soon. You probably won’t be in the house long enough to recoup closing costs.
• You’d use the savings for non-essential spending. Tapping home equity for short-term purchases, such as a car or vacation, can put your home at financial risk.
• You’re far into your loan term. If you’re past the midpoint, refinancing can reset the clock and increase your total interest cost. 
• You’re applying for other credit soon. A refinance can temporarily lower your credit score, which could impact upcoming loan applications.

Is refinancing worth it?

If refinancing saves you money, either by lowering your monthly payment, reducing total interest or helping you reach another financial goal, it may be worth the cost and time. Not only do you need to make sure your finances are in shape, but it’s also important to pay attention to the broader interest rate environment.

Frequently asked questions

• How does refinancing a mortgage work?

  Refinancing replaces your current mortgage with a new one. It’s often done to lower your interest rate, change the loan term, or access home equity.

  The process is similar to getting your original mortgage. You apply with a lender, provide financial documents, undergo a credit check and home appraisal and pay closing costs. Once approved, the new loan pays off your existing mortgage, and you begin making payments on the refinanced loan.

• Will I lose money if I don’t refinance?

  You won’t automatically lose money if you don’t refinance. It just means you’re sticking to your current loan. However, if today’s rates are lower than what you currently have, you could be missing out on savings. Before refinancing, calculate your break-even point to make sure refinancing makes sense.

• How soon can you refinance a mortgage?

  In many cases, you can refinance as soon as six months after closing on the original loan, called a “seasoning period,” though timing depends on your lender and loan type.

  Some government-backed refinance programs, such as FHA Streamline and VA (IRRRL) loans, also include timing rules. Even if your lender allows it, it’s usually smart to wait until refinancing offers a clear financial benefit, such as lower interest rates.

• Is now a good time to refinance?

  Mortgage rates are still relatively high compared to the historic lows of recent years. Many homeowners remain locked into rates below 5%, which they are unlikely to match now.

  That said, refinancing could make sense if your current rate is significantly higher than today’s averages. The right time to finance depends on how much you can save and how long you plan to stay in your house.