Refinancing replaces your current mortgage with a new one, ideally with better terms. It can lower your monthly payment, reduce total interest, shorten your loan term, or unlock cash from your equity. But refinancing comes with costs, so timing is everything. Here are five signs it might be time to refinance.
Sign 1: Rates Have Dropped Significantly
The most common reason to refinance is to take advantage of lower interest rates. The traditional rule of thumb is that refinancing makes sense when you can reduce your rate by at least 0.75% to 1%. However, on larger loans, even a 0.5% reduction can produce meaningful savings.
For example, on a $400,000 loan, reducing your rate from 7.0% to 6.25% lowers your monthly payment by about $200 and saves over $72,000 in total interest over 30 years.
Sign 2: Your Credit Score Has Improved Substantially
If your credit score has increased by 40 or more points since you took out your original mortgage, you likely qualify for a significantly better rate. This is especially true if you originally qualified with a score in the 620 to 680 range and have since moved above 740. The rate improvement alone could save you thousands.
Sign 3: You Want to Eliminate PMI
If you bought with less than 20% down, you are paying private mortgage insurance (PMI), which adds $100 to $300/month to your payment. If your home has appreciated or you have paid down your balance enough to have 20% equity, refinancing into a new loan without PMI can produce immediate monthly savings.
Some lenders will remove PMI on your existing loan without a full refinance. Call your servicer first to explore this option before committing to a refi.
Sign 4: You Want to Change Your Loan Term
Refinancing lets you restructure your loan timeline:
- 30-year to 15-year: Your monthly payment increases, but you pay dramatically less interest and build equity faster. On a $300,000 loan at 6%, switching from 30 to 15 years increases the payment by about $730/month but saves over $180,000 in interest.
- 15-year to 30-year: If you need lower monthly payments due to a financial change, extending your term reduces your payment significantly. This gives you breathing room, though you will pay more interest overall.
- ARM to fixed-rate: If you have an adjustable-rate mortgage and rates are reasonable, locking into a fixed rate provides payment certainty and protects against future rate increases.
Sign 5: You Need Cash for a Major Expense
Cash-out refinancing lets you borrow against your home equity. You take a new, larger loan and receive the difference in cash. This can make sense for:
- Home improvements: Renovations that increase your home's value can be a smart use of equity.
- Debt consolidation: Replacing high-interest credit card debt (18% to 25%) with mortgage debt (6% to 7%) can save substantial interest, but only if you commit to not running up new balances.
- Education or starting a business: Some borrowers tap equity for investments in their future earning power.
Be cautious with cash-out refinancing. You are putting your home at risk for the additional amount borrowed, and the new loan resets your amortization clock.
The Costs of Refinancing
Refinancing is not free. Typical costs include:
- Closing costs: 2% to 3% of the new loan amount ($4,000 to $12,000 on a typical loan)
- Appraisal fee: $400 to $700
- Title search and insurance: $500 to $1,500
- Application and origination fees: $500 to $2,000
Some lenders offer no-closing-cost refinancing, but they make up for it with a higher interest rate. Compare the total cost over your expected holding period to determine which option is truly cheaper.
How to Decide
- Calculate the break-even point. Divide total closing costs by monthly savings. If the break-even is under 3 years and you plan to stay longer, refinancing is likely a win.
- Compare total cost of the new loan vs. keeping the current one. Factor in remaining balance, remaining term, and total interest paid.
- Get quotes from multiple lenders. Rates and fees vary significantly. Use our find a lender tool to compare options.
- Consider your timeline. If you might sell within 2 to 3 years, the closing costs may not be worth it.
Use our refinance calculator to model different scenarios and see exactly how much you could save. And explore our full suite of mortgage calculators to understand every aspect of your home financing.