What are the pros and cons of refinancing your home?

When you refinance your mortgage, you replace your existing home loan with a new one that has new terms. Depending on market conditions, a refinance can help you lower your interest rate, reduce your monthly payment, or change your loan term. Refinancing¹ can help you achieve certain financial goals, but it can also come with drawbacks – including upfront costs. Let’s take a closer look at the potential pros and cons of a mortgage refinance to help you determine whether this is the right financial move for you.

What does refinancing a mortgage involve?

Refinancing a mortgage involves taking out a new home loan to pay off your original one. Your new mortgage will come with different terms that can help you achieve a financial goal. Borrowers commonly refinance to secure a lower mortgage rate and reduce their monthly mortgage payment, change their loan term, or borrow against their accumulated home equity.

Because every homeowner's goal is different, there are different types of refinance options available. For instance, a rate-and-term refinance changes your interest rate or loan term, a streamline refinance speeds up the application process for certain government-backed loans^2,3,4, and a cash-out refinance lets you turn your home equity into liquid funds.

What are the pros of refinancing your home?

Refinancing your mortgage can be a wise financial move that can help you save money or get financing. Let’s get into some of the potential benefits.

You might save on interest

One of the most common reasons to refinance is to pay less interest on your mortgage. If interest rates have dropped or your credit has improved, you may qualify for a lower interest rate on your mortgage. You can also save on interest by reducing your loan term and paying off your loan more quickly.

Let’s say you buy a home for $400,000 with 10% down and a 30-year fixed-rate mortgage at 7% interest⁵. After 6 years, you’ve paid down your mortgage balance from $360,000 to $333,690 and paid $146,135 in interest. If you stay with this loan for the full term, you’ll pay $502,232 in interest.

If you refinance your balance of $333,690 after 6 years to a new 30-year, fixed-rate loan with a 5% rate, you’ll pay $311,185 in interest on that loan. Combined with the interest paid on the first loan, that’s $457,320 in total interest, saving you $44,912.

You might get a lower monthly payment

If you refinance to a lower interest rate, it can help you reduce your monthly payment. Another way to get a lower monthly payment is to change your loan term. Giving yourself more time to repay the loan can help make each monthly payment smaller, though you may end up paying more in interest overall.

Suppose you have a 30-year mortgage for $360,000 with a 7% interest rate, your monthly payment is $2,395. After 6 years, you refinance your loan balance of $333,690 to another 30-year mortgage at the same rate. Your new loan has a lower starting balance and restarts the 30-year term, reducing your monthly payment to $2,220 and saving you $175 a month. The downside is that it will take longer to own your home outright.

Let’s say rates were low when you refinanced, so you also lowered your interest rate. Your new 30-year mortgage is $333,690 with a 5% interest rate. Now, your monthly payment is $1,791, saving you $604 a month. You can use our refinance calculator to better understand how different interest rates and loan terms can affect your monthly payment.

You can reduce your payoff time

You can also refinance your mortgage into a shorter term if your financial situation changes and you can afford a larger monthly payment. If you have a 30-year loan and, after 10 years, decide you would like to pay it off more quickly, you can refinance to a 15-year loan and own your home free and clear 5 years sooner. Shortening your loan term can also help you save on interest. Plus, the sooner you don’t have to worry about a monthly mortgage payment, the sooner you can start using that money for other financial goals.

You could switch to a fixed rate

If you currently have an adjustable-rate mortgage (ARM) and are approaching the period where your interest rate will begin adjusting, you might be feeling anxious about potential payment spikes. If you refinance an ARM loan into a fixed-rate mortgage, you lock in a single rate for the entire life of the loan. When weighing a fixed vs. adjustable-rate mortgage, the fixed option offers predictability for your principal and interest payments. This move can be especially useful if forecasts indicate that market rates are likely to rise.

You can borrow against equity for major expenses

A cash-out refinance allows you to take out a new loan based on your home’s current value, pay off your original loan, and withdraw the difference in cash. You can use the money to consolidate debts, pay for home renovations, or pay tuition or medical bills. The amount you withdraw will be added to your new mortgage.

Let’s say you bought your home 10 years ago for $290,000 with a 10% down payment and a 30-year fixed-rate mortgage at 4%. Your home is now worth $420,000, and you’ve paid down your mortgage balance to about $205,000. You’d have about $215,000 in equity in your home.

If you keep 20% equity in your home, you could refinance to a new 30-year fixed-rate loan at 7% for $336,000, pay off your original loan, and keep the difference of $131,000 in cash. The trade-off is your monthly payment would go from $1,612 to $2,235, and you’d add 10 years to your loan term.

You can get rid of mortgage insurance

If you put down less than 20% on a conventional loan, you are likely paying for private mortgage insurance (PMI). Similarly, government-backed loans often require their own forms of mortgage insurance – coverage that protects the lender, not you. As you pay off your mortgage and your home’s value increases, you build equity. If you have a conventional loan, you can eliminate PMI coverage once you hit 20% equity. Government-backed loans require mortgage insurance for the life of the loan, but you can get rid of mortgage insurance by refinancing to a conventional loan once you’ve hit that 20% equity threshold. Eliminating this extra premium can lead to significant monthly savings.

What are the cons of refinancing your home?

While the benefits can be appealing, there are also costs, risks, and situations where refinancing isn’t financially beneficial. Here are some of the potential downsides of refinancing.

It involves a thorough application process

Refinancing means going through the mortgage application process all over again. You’ll need to provide extensive income documentation, meet lender requirements, get a new home appraisal, and pass the underwriting process. You can expect the refinance process to take an average of 30 to 45 days. The application will trigger a hard inquiry on your credit report which can temporarily lower your credit score. You will need to consider whether the financial payoff justifies this time and effort.

You may pay closing costs

Just like your original mortgage, a refinance requires paying closing costs, which typically run between 3% and 6% of your new loan amount. These expenses include appraisal fees, title insurance, and loan origination fees.

To determine if the cost of refinancing is worth it, calculate your break-even point – which is the time it takes for your monthly savings to cover your upfront fees. For example, if your closing costs are $3,000 and your new loan saves you $100 a month, it will take 30 months to break even. If you plan to sell the home before those 30 months pass, refinancing might be a money-losing move.

You could get a higher monthly payment

Refinancing can increase your monthly payment if you end up with a higher interest rate or shorter loan term. This usually happens if you refinance to a 15-year mortgage from a 30-year term to pay off the home faster or if you take cash out when interest rates have increased since you first took out your mortgage. Committing to an unrealistically large payment can stretch your budget too thin. Just be sure you can afford the higher payment because if you default, you run the risk of losing your home due to foreclosure.

You might pay more interest

Resetting the clock on a 30-year mortgage means extending the amount of time you spend paying interest. Even if your monthly payment drops, keeping yourself in debt for a longer period can significantly increase the overall cost of your loan. You can use an amortization schedule tool to see exactly how much goes to the lender over time. It’s always important to weigh those immediate monthly savings against the potential for higher long-term interest charges.

It could reduce your home equity

When you choose a cash-out refinance, you are borrowing against the ownership stake you have built up. Using this home equity reduces your equity in the property, and it can take a while to rebuild that borrowed equity. Draining your equity can also leave you vulnerable to housing market fluctuations. If local property values drop, you could find yourself with an underwater mortgage – meaning you owe more on the home than it is currently worth.

When refinancing might be the right move

If you’re deciding whether you should refinance, consider the pros and cons alongside your personal goals and financial situation. Refinancing might be a great financial decision if:

• You get meaningful interest savings: If market rates have dropped significantly since you closed your original loan, refinancing can lower your monthly payment and borrowing costs.
• Your financial situation has improved: If your credit score has improved or your income has jumped since you bought the house, you now pose less risk to lenders. This improved financial health often qualifies you for much more favorable loan terms and lower interest rates.
• You get a more manageable monthly payment: Sometimes the goal is simply securing more cash flow for daily life. Refinancing to stretch out your loan term or drop your rate can immediately reduce your monthly housing obligation, giving your budget some much-needed breathing room.
• You want to consolidate high-interest debt: If you have expensive credit card balances or medical bills, using a cash-out refinance for high-rate debt consolidation can be a wise solution.
• You’ll live in the house long enough to break even: Refinancing makes the most sense when you plan to stay in your current home for the foreseeable future. Staying put ensures you have enough time to recoup your upfront closing costs and start enjoying true financial savings.

If any of these scenarios sound like you, we highly encourage you to speak with a Rocket Mortgage Home Loan Expert to explore your options.

What are alternatives to refinancing your mortgage?

If a full refinance isn’t worth it for you, then you have other financing options. Depending on your situation, there can be other ways to pay off a mortgage faster, reduce interest charges, get funds for major expenses, or borrow against your equity without refinancing.

• Make extra principal-only payments: These additional principal payments go toward the principal and reduce the amount of interest you’ll pay over your loan term. They also allow you to pay off your loan early without any application fees.
• Use a personal loan: A personal loan can be another borrowing option if you don’t want to cut into your equity or use your home as collateral. However, personal loans often come with higher interest rates than you’d get with a refinance.
• Get a home equity loan or HELOC: A home equity loan ⁶ and a HELOC are second mortgages that use your house as collateral. With a HELOC, you can borrow money up to the credit line pegged to your equity and repay it with interest, whereas a home equity loan provides a lump sum. If you have enough equity, these options can help you borrow at a lower rate without touching your primary mortgage.
• Apply for a zero-interest credit card: Some credit card providers offer 0% interest rates for a specific period if you transfer your balances. Just beware that once the introductory period expires, you’ll be charged the standard rate.

If payment affordability is your primary concern, consider these steps:

• Review your income and expenses: Before borrowing more money, take a hard look at your monthly budget. Canceling unused subscriptions, reducing discretionary spending, or finding a side hustle can free up the cash flow you need to tackle debt or handle home repairs.
• Consider downsizing: If your mortgage payment has simply become unaffordable, moving to a smaller, less expensive property might be the most practical solution. You can explore if you should sell your house and rent when you retire or buy a more budget-friendly home.

FAQ

Let’s look at some of the frequently asked questions about refinancing your mortgage.

What’s the difference between a second mortgage and a refinance?

A refinance replaces your existing primary home loan with a brand-new one. A second mortgage is an entirely separate loan taken out in addition to your current mortgage, leaving your original loan terms untouched. However, your home is still held as collateral for your second mortgage.

How soon can I refinance my home?

You can technically refinance your house as soon as you want for certain rate-and-term loans, provided you meet your lender's guidelines. However, many lenders and loan types require a "seasoning period" of at least six months before they will approve a cash-out refinance.

How much home equity do I need to refinance?

Standard refinance mortgage requirements usually require that you leave at least 20% equity in the home if you are doing a cash-out refinance. For a traditional rate-and-term refinance, you typically need to retain at least 3% to 5% equity, depending on your loan type.

Can I refinance my mortgage if I have bad credit?

It is possible to refinance with bad credit, particularly if you explore government-backed options like FHA or VA streamline refinances, which often have more lenient credit requirements. However, keep in mind that a lower credit score generally results in higher interest rates on conventional loans.

The bottom line: The pros of refinancing might outweigh the cons

Refinancing can be a great call if you have a specific goal you’re looking to achieve. If you can lower your interest rate and monthly payment, adjust your loan term toward your advantage, or borrow money against your equity at a low interest rate, refinancing may be the right option. However, it’s important to understand how refinancing works and the other financing options available before you make a final decision.

If you think refinancing might be right for you, you can apply for initial approval with Rocket Mortgage and start the refinancing process today.

¹Refinancing may increase finance charges over the life of the loan.

² Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

³ The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rare or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

⁴ The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

⁵ Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

⁶ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90% Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher-priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.