Should You Refinance Your Home?

Key Takeaways:

• Refinancing can save you money, but only if the numbers and timing align. A rate drop of 0.75% or more, improved credit, and plans to stay in your home for several years are strong indicators it’s worth considering.
• Your life circumstances matter. Major changes in income, equity, or financial goals (like needing cash for renovations or wanting to pay off your home faster) should guide your refinancing strategy.
• Not all refinancing is equal. Understand the differences between rate-and-term, cash-out, and cash-in refinancing to choose the option that best fits your financial priorities.

Refinancing your home isn't just about getting a lower interest rate—it's about aligning your mortgage with your life goals. Whether you're looking to reduce monthly payments, access your home's equity, or switch from an adjustable to a fixed-rate mortgage, this guide will help you make an informed decision that fits your unique situation.

Quick Answer: Should I Refinance My Mortgage?

Yes, if:

• Current rates are 0.75% or more below your rate
• You'll stay in your home 3+ years past break-even
• Your credit score has improved significantly
• You have 10%+ equity in your home

Maybe, if:

• Rate difference is 0.5-0.75%
• You need cash for home improvements
• You want to switch loan types (ARM to fixed)

Probably not, if:

• You plan to move within 2-3 years
• Rate difference is less than 0.5%
• Your credit score has declined

The average homeowner who refinances may save $200 - 300 per month on their mortgage payment, but refinancing isn't right for everyone. To see how much you could save, try our Mortgage Refinance Calculator.

How Do You Calculate Refinancing Break-Even?

Before jumping into a refinance, it’s important to understand when the savings actually start to outweigh the costs. That’s where the break-even point comes in. It tells you how long it will take for your monthly savings to cover the upfront expenses.

Use these calculations to determine how long it will take to recoup your refinancing costs through monthly savings.

Break-even formula:

• Calculate current monthly payment using current interest rate
• Calculate new monthly payment using new interest rate
• Monthly savings = Current payment - New payment
• Break-even months = Closing costs ÷ Monthly savings

Example Calculation:

• Current Rate: 4.5% on $250,000 balance = $1,267 monthly payment
• New Rate: 3.25% on $250,000 balance = $1,088 monthly payment
• Monthly Savings: $179
• Closing Costs:$5,000
• Break-Even:28 months

When Should You Refinance Your Home?

Refinancing isn’t one-size fits all, it depends on your financial goals, current mortgage terms, and future plans. Before making a move, consider these key factors to help determine if now is the right time to refinance.

Interest Rate Environment

• Refinance if: Current rates are at least 0.75% lower than your current rate
• Consider waiting if: Rate difference is less than 0.5%
• Key insight:Even a 1% rate reduction on a $300,000 mortgage can save you $200+ monthly. Calculate your mortgage.

How Long Will You Stay in Your Home?

• Good candidate if: You plan to stay in your home for 3+ years beyond the break-even point
• Proceed cautiously if: You might move within 2-3 years
• Key insight: Most refinances break even within 18-36 months

Has Your Credit Score Improved?

• Ideal scenario: Your credit score has improved by 50+ points since your original mortgage
• Still beneficial: Credit score improvement of 20-49 points
• Key insight: Better credit can unlock significantly lower rates

What’s Your Current Equity Position?

• Strong position: 20%+ equity (avoids PMI)
• Moderate position: 10-20% equity
• Key insight: Building equity in your home can unlock lower rates and more flexible loan options.

What Are Your Cash Flow Goals?

• Lower payments: Extend loan term or reduce rate
• Faster payoff: Shorten loan term with similar payments
• Key insight:Your refinancing strategy should reflect what matters most to you, whether that’s lowering monthly payments or paying off your home faster.

Have You Had Major Life Changes?

• Income increase: Consider shortening loan term
• Income decrease: Extend term to lower payments
• Key insight: Your mortgage should adapt to your current situation.

What Are Real Examples of Refinancing Decisions?

Every homeowner’s situation is different, and real-life examples can help bring the refinancing process to life. Here are a few scenarios that show how refinancing decisions play out based on individuals goals, financial circumstances, and timing.

Real Scenario:The Established Homeowner

• Situation: A nurse bought her home 3 years ago with a 4.5% rate. Current rates are at 3.2%.
• Numbers: $280,000 loan balance, $1,847 current payment, estimated $4,200 closing costs
• Decision: She refinanced and now saves $247 monthly. Her break-even point was 17 months, and she plans to stay in her home for at least 5 more years.
• Outcome: Annual savings of $2,964 helped boost her emergency fund and increase her 401(k) contributions.

Real Scenario: The Recent Retirees

• Situation: A recently retired couple has 12 years left on their current mortgage at 4.8%. They rely on fixed income from pensions and Social Security.
• Numbers: $95,000 remaining balance, considering cash-out refi for home improvements
• Decision: They chose a rate-and-term refinance to 3.1% instead of cash-out, reducing their payment by $89 monthly.
• Outcome:Lower payments preserve their retirement cash flow, and they're using a home equity line for renovations instead.

When refinancing doesn’t make sense:

• Moving within 2 years of break-even point
• Using cash out refinancing for non-essential or non-investment purposes
• Extending loan term without clear benefit

These examples show that refinancing can serve a variety of goals, from lowering monthly payments to funding investments or adapting to life changes. The key is understanding your financial picture and choosing a strategy that supports your long-term plans. With the right timing and terms, refinancing can be a smart step toward greater financial flexibility.

What Are the Different Types of Refinancing?

Not all refinancing options are created equal. Depending on your goals, whether it’s lowering your monthly payment, accessing cash, or eliminating PMI, there’s a refinancing type that may be right for you. Here’s a breakdown of the most common options and what to consider with each.

Rate-and-Term Refinance (No-Cash-Out Refinance)

The most common type—simply replacing your current mortgage with a new one featuring better terms. 

Pros:

1. Lower interest rates
2. Reduced monthly payments
3. Switch from ARM to fixed rate
4. Shorten loan term to save interest

Considerations:

1. Closing costs required 
2. Resets loan term (unless you shorten it)
3. May extend time to payoff

What happens next: Apply with documentation, schedule appraisal, close within 30-45 days.

Cash-Out Refinance

Borrow more than you owe and receive the difference in cash for home improvements or debt consolidation.

Pros:

1. Access home equity
2. Potentially lower rate than credit cards
3. Tax-deductible if used for home improvements
4. Consolidate high-interest debt 

Consideration:

1. Higher loan balance
2. Slightly higher rates than rate-and-term
3. Reduces home equity
4. Risk if property values decline

What happens next: Provide documentation for intended use of funds, higher scrutiny during underwriting. 

Cash-In Refinance

A cash-in refinance involves bringing money to the closing table to pay down your mortgage balance. This strategy is often used to reach 20% equity faster, eliminate private mortgage insurance (PM9I) or qualify for a lower interest rate.

What Documents Do You Need to Refinance?

Before You Apply?

1. ☑ Check your credit score and report for errors
2. ☑ Gather recent pay stubs, tax returns, and bank statements
3. ☑ Determine your home's current market value
4. ☑ Calculate your current loan-to-value ratio
5. ☑ Research current mortgage rates from multiple lenders
6. ☑ Understand closing costs and fees
7. ☑ Consider your long-term housing plans

Red Flags That Might Delay Your Refinance:

1. ☑ Recent job change or income reduction
2. ☑ New debt or missed payments in past 12 months
3. ☑ Home value decline since purchase
4. ☑ Less than 12 months since last refinance
5. ☑ Planning to move within 2-3 years

What happens next: Submit application with all documents, schedule appraisal, complete underwriting process. 

What Are Common Refinancing Mistakes to Avoid?

Refinancing can be a great way to save money, but it’s important to go in with a clear strategy. To make the most of your refinance, it’s important to avoid common pitfalls that could cost you more in the long run. Here are a few mistakes to watch out for before you sign on the dotted line.

Focusing Only on Interest Rates

While rate is important, consider the total cost including closing costs, loan term changes, and your break-even timeline.

Suggested replacement copy for above: Interest rate matters, but it’s just one part of the equation. Be sure to factor in closing costs, loan term adjustments, and how long it will take to break even.

Extending Your Loan Term Without Consideration

A 30-year refinance might lower payments but could increase total interest paid over the life of the loan.

Cashing Out Without a Clear Plan

Using home equity for vacations or luxury purchases puts your home at risk. Focus on investments that add value.

Not Shopping Around

Rates and fees can vary significantly between lenders. Get quotes from at least 3-4 lenders.

Ignoring Closing Costs

Factor in all costs: appraisal, title insurance, origination fees, and prepaid items. These typically range from 2-5% of the loan amount.

What’s Your Refinancing Action Plan?

Once you’ve explored your options and understand your goals, the next step is putting a plan into motion. Whether you’re ready to refinance now or just gathering information, having expert guidance can make the process smoother and more rewarding. Let’s take a look at how to get started with confidence.

Ready to Explore Refinancing?

Experienced mortgage specialists can help you evaluate your options and find the right solution for your goals. Wide variety of financing options and step-by-step guidance throughout the process ensure you make the best decision for your financial future.

Your 30-Day Refinance Timeline:

• Week 1: Check credit, gather documents, research rates
• Week 2: Get quotes from multiple lenders, compare offers
• Week 3: Submit application, schedule appraisal
• Week 4:Final underwriting, prepare for closing

What happens next: Once you close, your new servicer will handle the payoff of your old loan and begin collecting payments.

Bottom Line:

Refinancing is a powerful financial tool, but it's not right for everyone in every situation. The key factors are rate improvement, break-even timeline, and your long-term housing plans. When done strategically, refinancing can save you thousands of dollars and help you achieve your financial goals faster.