Mortgage Refinancing Guide: When & How to Refinance
Refinancing replaces your current mortgage with a new one, ideally with better terms. Done right, it can save you thousands. Done wrong, it can cost you. This guide helps you decide if refinancing makes sense for you.
Good Reasons to Refinance
Lower Interest Rate
Even a 0.5% rate drop can save significant money over the life of your loan. Rule of thumb: consider refinancing if rates are at least 0.75-1% lower than your current rate.
Shorten Your Loan Term
Refinancing from 30-year to 15-year can dramatically reduce total interest paid, even if the rate drop is small.
Remove PMI
If your home has appreciated and you now have 20% equity, refinancing can eliminate PMI payments.
Cash-Out Refinance
Tap home equity for major expenses like renovations or debt consolidation. Be cautious—this increases your loan balance.
Switch from ARM to Fixed
If you have an adjustable-rate mortgage and plan to stay long-term, lock in a fixed rate before your adjustment period.
The Break-Even Calculation
Refinancing costs money (typically 2-5% of the loan). Calculate your break-even point:
Break-Even (months) = Closing Costs ÷ Monthly Savings
Example
- • Refinancing costs: $5,000
- • Monthly savings: $150
- • Break-even: $5,000 ÷ $150 = 33 months
If you plan to stay in the home more than 33 months, refinancing makes sense.
Use our refinance calculator to run the numbers for your situation.
When NOT to Refinance
- You plan to move within 2-3 years
- You've already paid off most of your loan (most interest is paid early)
- Your credit score has dropped significantly
- Rates haven't dropped enough to justify closing costs
- Your current mortgage has a prepayment penalty
The Refinancing Process
Check Your Credit & Equity
Better credit = better rates. Ensure you have enough equity (ideally 20%+).
Shop Multiple Lenders
Get quotes from at least 3 lenders. Compare rates, fees, and terms.
Gather Documents
Pay stubs, tax returns, bank statements, insurance info.
Apply & Lock Your Rate
Submit application and consider locking your rate if timing is right.
Appraisal & Underwriting
Lender will order appraisal and review your financials.
Close
Sign documents, pay closing costs, and start saving!
Refinancing Quick Checklist
- Current rate is 0.75%+ above market rates
- Plan to stay in home 3+ years
- Credit score is good (720+)
- Have 20% equity (or close)
- No prepayment penalty on current loan
Calculate your refinance savings
Refinance Calculator