Should I refinance my mortgage?

Refinancing your mortgage can help you reduce your interest rate, change your loan terms, or borrow your home equity. ¹,² However, it isn't the right move for everyone. The math matters. Compare your total closing costs with your projected monthly savings and calculate your break-even point to see when you’ll come out ahead. Learn more about common reasons to refinance, and when it might make sense to replace your mortgage.

Key takeaways:

• Refinancing can help you get a lower interest rate, reduce your monthly payment, or borrow your equity.
• Refinancing makes financial sense if you plan to stay in your home past your break-even point, which is how long it takes for your savings to recoup your closing costs.
• Refinance closing costs typically range between 3% - 6% of the loan amount, covering fees for appraisals, credit checks, title searches, and loan origination.

What does it mean to refinance a mortgage?

Refinancing a mortgage means taking out a new home loan to pay off and replace your existing primary mortgage.

For example, if mortgage rates are now lower than they were when you first took out your home loan, you could refinance to get a lower interest rate and reduce your monthly payment.

However, refinancing also requires closing costs, just like when you took out your original mortgage.

How mortgage refinancing works

When you refinance, you pay off your existing mortgage with a new loan that has new terms. You can refinance with your existing lender or work with a new one.

You’ll need to meet eligibility requirements, and the lender will underwrite the loan to confirm you can afford it. Once they’ve reviewed your finances and approved you for the new loan, you’ll pay your closing costs and finalize your refinance.

When does it make sense to refinance your mortgage?

Here are some examples of how refinancing can help you achieve your financial goals.

Current interest rates are lower than your present rate

Refinancing makes sense when you can get a lower interest rate and reduce your monthly payment. Lowering your interest rate is one of the most common reasons to refinance.

Mortgage industry guidelines suggest considering a refinance if prevailing market rates drop 0.75% to 1% below your current mortgage rate. Smaller rate reductions can still yield substantial savings on larger loan balances.

You plan to stay past your break-even point

Your break-even point is how long it takes for you to recoup the up-front costs of refinancing and begin saving money. If you intend to live in your home long enough to recover your closing costs through monthly payment savings, refinancing can save you money. If you plan to sell or move before you reach the break-even point, you’ll lose money by refinancing.

Your monthly savings outweigh your closing costs

Even if a refinance lowers your monthly bill, you still must account for closing costs. Always compare your total out-of-pocket cost to refinance against your projected savings to confirm the numbers align with your financial goals.

Reasons to refinance your mortgage

Let’s look at some common reasons to refinance your mortgage.

Reducing your interest rate

Mortgage interest rates fluctuate all the time. If rates have declined since you bought your home, refinancing could reduce your mortgage payment and save you money on interest.

Let’s look at how much a 1% difference in your mortgage rate affects your monthly payment for principal and interest.

You would save $263 a month by lowering your interest rate by 1%. In this scenario, securing a 1% lower rate saves $263 per month in principal and interest. Over 30 years, that reduction equates to $94,683 in cumulative interest savings.

Keep in mind that you must pay closing costs, property taxes, and homeowners insurance premiums in addition to the principal and interest.

Be sure to discuss any refinancing requirements with your lender before you make your decision.

Changing your loan term

A refinance also can allow you to extend or shorten your loan term.

For example, you can refinance a 15-year mortgage to a 30-year loan, which would reduce your monthly payment but cost you more in overall interest.

You also could refinance from a 30-year term to a 15-year loan, which would increase your monthly payment, but you could pay off the loan more quickly and save money on interest.

Paying off other debts with a cash-out refinance

A cash-out refinance replaces your current loan with a larger one based on your home's fair market value, letting you keep the difference between your new loan amount and your old loan balance. You can use this home equity to pay off high-interest debts like credit cards, but you'll repay it as part of your new mortgage, which increases the total amount you owe.

This can save you money because mortgage interest rates are lower than those for unsecured debts like credit cards. It also simplifies your finances by consolidating your expenses into one monthly bill.

Making home renovations

Borrowing your equity with a cash-out refinance to pay for renovations like fixing a broken HVAC system or replacing the pink linoleum in the bathroom can save you money on interest and provide tax deductions.

With a cash-out refinance, you typically can use the mortgage interest tax deduction only up to the amount of your previous balance or loan. But if you use the proceeds to improve your home, you also may be able to deduct the interest paid on that portion of the loan.

Converting an ARM to a fixed-rate mortgage

An adjustable-rate mortgage (ARM) generally offers borrowers a lower interest rate during the introductory fixed-rate period at the beginning of the loan. But after it expires, usually after 5, 7, or 10 years, the interest rate will adjust according to market rates. This means your payment will adjust and may increase.

For this reason, some homeowners refinance their ARM to a fixed-rate mortgage to eliminate adjustments and ensure a predictable monthly payment.

It’s also possible to refinance a fixed-rate mortgage to an ARM. This involves some risk, but it could be a smart option if interest rates are falling. It also may save you money if you plan to sell your home before the fixed initial rate expires.

Eliminating mortgage insurance

If you bought your home with less than 20% down on a conforming conventional mortgage, you're required to pay for private mortgage insurance (PMI).

The cost of PMI typically ranges between 0.5% – 1% of your total loan amount per year. Once you reach 20% equity in your home, you can cancel PMI, or it will be automatically removed when you have 22% equity.

However, if your home's value has increased enough that refinancing a conventional loan gets you at least 20% equity, you can eliminate PMI payments. Just remember, you also pay closing costs to refinance.

If you have an FHA mortgage, you pay mortgage insurance premiums (MIP) for either 11 years or the full loan term, depending on how much you put down. In that case, refinancing to a conventional loan with at least 20% equity would allow you to eliminate those payments.³

Adding or removing a borrower

If you want to add or remove a borrower from your mortgage, your lender may require you to refinance. You can add someone to the title of your home without adding them to the mortgage, but in most cases, adding or removing a borrower requires financing, with a common exception being when one borrower dies.

When should you not refinance your mortgage?

Refinancing is not always advantageous. Your monthly payment could increase if mortgage rates are higher or your credit score has dropped. Here are some cases where it doesn’t make sense to refinance.

You plan to sell before your break-even point

If you intend to sell your home before you recoup your upfront costs, you’ll lose money by refinancing. Be sure to calculate your break-even point before you refinance, so you know when you’ll start saving money.

You are late in your loan term

During the final years of a 30-year mortgage, most of your monthly payment goes toward principal rather than interest. Refinancing late in your loan term resets your amortization schedule, directing your monthly payments more toward interest again and increasing your overall borrowing costs.

High fees erase your projected savings

Closing costs for a mortgage refinance typically range from 3% – 6% of the loan amount. If closing fees on a $300,000 refinance total $12,000, but your new mortgage only saves you $100 per month, it would take 10 years to break even.

Your credit or home value has declined

If your credit score has dropped significantly or local property values have fallen, you may not qualify for competitive interest rates. That means your interest rate could be higher after you refinance and pay closing costs.

Your mortgage has a prepayment penalty

Some existing mortgage contracts carry a prepayment penalty clause that charges a fee for paying off the loan early. Check your current loan agreement to confirm whether a prepayment penalty applies before proceeding.

Questions to ask before you refinance

Here are some questions to ask to help you decide if you’d benefit from a refinance.

What are my goals?

Understanding your short- and long-term goals is important before deciding to refinance.

Review the details of your current mortgage and look for terms you can improve. Determine whether your primary objective is lowering your monthly payment, paying off your mortgage faster, accessing cash equity, or locking in a predictable fixed rate.

Do you plan to sell your home or make any other large investments in the next 5 – 10 years? Answers to questions like this will help you decide whether the cost is worth it.

What will refinancing cost me?

Refinancing comes with pros and cons, like closing costs, so take these into account when deciding when to refinance, particularly if you’re planning to sell soon. Generally, closing costs for refinancing will be 3% – 6% of your refinance loan’s value. Request a Loan Estimate from lenders to review itemized upfront costs.

How much could refinancing save me?

To get a basic idea of how a refinance could affect your finances, use the Rocket Mortgage refinance calculator to see how variables like your loan amount, home value, ZIP code, and credit score range affect your monthly payment.

What is my break-even point?

To understand how long it will take for your monthly savings to recoup what you spent on closing costs, you'll want to calculate your break-even point.

Calculate how many months it will take to recover your closing costs using the following formula:

Let’s say you save $200 a month by refinancing, and your closing costs are $15,000. Divide your closing costs by your monthly savings ($15,000 / $200), and you’ll see it should take 75 months – or 6 years and 3 months – to break even.

This may seem like a long time, but if you’re planning to stay longer than that, you’ll save money by refinancing. If you plan to sell before then, refinancing costs you more than you'll save.

Should I shop around for a refinance?

Yes. Rates, loan origination fees, and closing costs vary across mortgage providers. Comparing quotes from multiple lenders or brokers helps secure the most favorable pricing.

Should I choose a custom loan term?

You do not have to reset your mortgage to a full 30-year term. Many lenders, including Rocket Mortgage, offer custom terms that match your remaining loan duration, so you don’t have to extend your repayment schedule.

Should I refinance now or wait?

Timing matters when weighing refinancing decisions.

Should I refinance after 1 year?

You can refinance after 1 year if market interest rates have dropped sufficiently, and your home's equity meets your lender’s requirements. You’ll typically need at least 20% equity for a cash-out refinance. Also, be sure you have the savings to cover closing costs all over again a year later.

Should I refinance from a 30-year mortgage to a 15-year mortgage?

Refinancing from a 30-year to a 15-year mortgage helps you pay off your home in half the time, which can save you on interest. You also can typically score a lower interest rate. However, your monthly payment is going to be higher because you’re paying the same principal balance off over a shorter period.

FAQ

Here are the answers to some frequently asked questions about refinancing.

Is it a good idea to refinance the mortgage now?

Refinancing is a good idea if current interest rates are lower than your existing rate, your credit score is strong, and you plan to stay in the home past your calculated break-even point.

Is there a downside to refinancing your mortgage?

Yes. Downside factors include paying closing costs and potentially increasing how much interest you’re paying overall.

Is it worth refinancing from 7% to 6%?

Yes, it can be. Dropping your rate by 1% on a typical mortgage balance saves you money each month and significant long-term savings, provided you stay past your break-even point.

Should I refinance my mortgage to pay off debt?

Using a cash-out refinance to consolidate high-interest credit card debt into a lower-rate mortgage can save money on interest, but it converts unsecured debt into secured debt tied to your primary residence.

The bottom line: Consider the costs, savings, and timing

Refinancing your mortgage can reduce your monthly housing expenses, shorten your loan duration, or provide cash equity for home improvements. Before applying, calculate your break-even point, compare closing costs across multiple lenders, and ensure the new loan aligns with your long-term plans.

If you're ready to see what's possible for your home, apply online today with Rocket Mortgage.

¹ 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/rates, where current pricing and various loan terms are made available.

² Refinancing may increase finance charges over the life of the loan.

³ Rocket Mortgage is not acting on behalf of FHA or HUD.

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, investment or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage LLC or its affiliates.