When should I refinance my mortgage?

Refinancing your mortgage can help you reduce your interest rate, borrow your home equity, or change your loan term – but it isn’t the right move for everyone.¹ Learn more about when to refinance your mortgage, how to weigh closing costs against savings, and what to consider before you apply.

Reasons to refinance your mortgage

Here are some common reasons to refinance your mortgage:

1. 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.

Based on this data, you could save $263 a month by lowering your interest rate by 1%. Over your 30-year loan term, that saves you $94,683 in interest.

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.

2. Changing loan terms

A refinance can allow you to change loan terms.

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'd pay off the loan more quickly and save money on interest.

3. Paying off other debts

A cash-out refinance allows you to borrow your home equity, which you can use to pay off high-interest debts like credit cards. You do this by taking out a new mortgage based on your home's current fair market value and paying off your current loan. You repay the leftover cash, which you can use for anything you like, as part of your new mortgage. 

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 bills into one monthly bill.

4. 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 substantially improve your home, you also may be able to deduct the interest paid on that portion of the loan.

5. 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, your interest rate will adjust – and not always in your favor.

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.

6. Eliminating mortgage

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 is typically between $30 and $70 a month for every $100,000 borrowed. Once you reach 20% equity in your home, you can request cancellation of 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 have to 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.

7. 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 an exception common when one borrower dies.

4 questions to ask yourself about refinancing

Before you refinance, there are four main questions to consider.

1. 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. Think carefully about what the future holds. 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.

2. 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.

3. 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.

4. What is my break-even point?

Refinancing can save you money by reducing your monthly payment, but it also costs money up front in the form of closing costs.

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.

Let’s say you save $200 a month by refinancing, and your closing costs are $18,000. Divide your closing costs by your monthly savings ($18,000 / $200), and you’ll see it should take 90 months – or 7½ years – to break even.

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

The bottom line: Consider all the factors before refinancing

Refinancing is a strategic move that can lower your monthly expenses, help you pay off debt faster, or provide the cash you need for home improvements. By understanding your break-even point and aligning the new loan with your long-term goals, you can make a decision that improves your financial health.

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

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

Important Legal Disclosure:

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.