Refinancing your mortgage involves replacing your existing home loan with a new mortgage loan to achieve better terms or financial goals. Well, there are many reasons why people choose to refinance. Some main reasons include switching loan plans, taking cash from their home equity, or lowering their interest rate.
While all this sounds very impressive, there are some factors to consider before deciding whether refinancing will be beneficial for you in the long run. In this guide, you’ll learn how to evaluate the process of refinancing your mortgage, including whether replacing your existing home loan with a new mortgage loan is the right choice, the pros and cons of refinancing, when to refinance and how to know if you’ll benefit from it.
The refinancing process is often less complicated than the home buying process, although it includes many of the same steps. For instance, the lender will order an appraisal to determine the property’s fair market value, just like when you took out your original mortgage.
When to Refinance Your Home?
A mortgage refinance involves revising and replacing the terms of your mortgage agreement. As mentioned earlier, every homeowner has a different refinancing goal. There are various refinancing options and loan options available, each tailored to different financial needs.
While there are several benefits of refinancing, it’s important to know when the timing and circumstances are right for it to make sense. Homeowners should consider refinancing only if current interest rates are significantly lower than their existing rates.
Refinancing typically costs between 2% and 5% of the new loan amount in closing costs, so it’s crucial to ensure the savings outweigh these expenses. This section will cover when refinancing makes sense and how different refinances can help you achieve your specific goals.
Here are scenarios when you can consider refinancing:
To Get a Lower Interest Rate
This is one of the major reasons many homeowners refinance. If mortgage rates have dropped since you obtained a mortgage, a rate-and-term refinance can provide you with a lower rate as long as you qualify.
Research shows that most buyers in 2025 need at least a 0.75% drop to see any meaningful savings and break even in under three years. If you have a 15-year mortgage, you may benefit from a smaller decrease, like 0.50%.
A lower interest rate will save you on both short- and long-term interest and may reduce your monthly payment. When comparing refinance offers, it’s important to look at the annual percentage rate (APR), which includes not just the interest rate but also fees and other charges, giving you a more complete picture of the loan’s total cost.
For example, if you have a $100,000, 30-year mortgage at 7%, your monthly payment is $665. If the rate drops to 5%, you pay $536 per month. Keep in mind that how much you save depends on how far along you are in your mortgage payment and how much your closing costs are (more on this later).
To Change Your Loan Term
This depends solely on your financial goals; you can either refinance your mortgage to lengthen or shorten your loan term. When refinancing, you can choose from 10,15, or 30-year loan terms. If you want to make lower monthly payments, you can refinance for a longer term. While lengthening your terms means paying more interest in the long term, it still works if you’re looking for short-term relief with your expenses.
On the other hand, if your goal is to pay off the loan faster and lower your long-term interest rate, you can refinance to a shorter loan term. Shortening your loan term could mean paying a higher monthly payment, but your overall savings will be substantial.
To Change Your Loan Type
Mortgage refinancing can help convert a government-backed loan to a conventional loan, offering some financial relief. When considering refinancing, it’s important to understand the different loan types—such as FHA, VA, conventional, and streamline loans—as each has its own eligibility requirements, restrictions, and benefits.
For example, if you have an FHA loan guaranteed by the Federal Housing Administration and you only made a down payment of less than 10%, you’re paying mortgage insurance for the entire loan term. Once you have 20% equity in the home, you can refinance to a conventional loan and get rid of the mortgage insurance.
To Use Equity
If you have a large expense like paying college tuition, investing in property, reducing high-interest debt, or funding home improvements, you can use a cash-out refinance to tap into your home’s equity for cash. Many homeowners use cash-out refinancing to fund home improvements, renovations, or repairs that can increase the property’s value.
For example, let’s say you have $200,000 remaining on your mortgage and your home is worth $500,000. You can refinance for $250,000 and receive $50,000 in cash to address your financial emergency. This approach can also be used to consolidate other loans, such as personal loans, into a single mortgage payment.
Alternatively, a home equity loan is another way to access your home’s equity for large expenses, offering a different borrowing option compared to cash-out refinancing. Lenders limit you to borrowing up to 80% of your home’s current market value, based on the amount of home’s equity available. Note that this option increases the total loan amount to give you access to cash, while still maintaining home ownership. Prepayment penalties may apply to existing mortgages and should be factored into the refinancing calculations.
To Add or Remove a Borrower
Refinancing gives you a new home loan, so it’s an opportunity to change the co-borrowers on the loan if need be. This comes in handy if you’re going through a divorce and one of you is keeping the house; refinancing allows you to remove the spouse as a co-borrower.
On the other hand, if you just got married and your spouse has a really good credit score, you can add them as a co-borrower, allowing you to qualify for better terms on your loan.
To Get Rid of PMI
If you have a conventional loan and you paid less than a 20% down payment, you’ll pay private mortgage insurance (PMI). Your lender automatically ends the PMI payments once you have 22% equity, but you can get rid of the PMI once you reach 20% equity. This is if you choose a traditional refinance instead of a cash-out refinance. Additionally, if your home value has increased or you’ve reduced your principal balance substantially, you may be able to eliminate or reduce private mortgage insurance through refinancing.
Change the rate structure.
Besides shortening the loan term and lowering the rate, some homeowners refinance to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan, or vice versa. Adjustable rate mortgages (ARMs) have interest rates that can change over time, which means your payments may increase or decrease after the initial fixed-rate period, while a fixed rate refinance loan or fixed rate mortgage offers consistent monthly payments throughout the loan term. A fixed rate is easier to budget since the monthly payments are consistent. On the other hand, switching from a fixed-rate loan to an ARM may allow you to lower payments once the rate adjusts.
When Not to Refinance Your Home
Refinancing your home has many benefits, but it’s not worth it when the downsides outweigh the benefits. Here’s when not to refinance your home:
- You’ll pay a lot more in interest: If the prevailing rates are higher than your mortgage rate, or you have bad credit that doesn’t qualify for a lower rate, it’s best not to take out a new loan.
- You don’t plan to stay in your home long enough: When you refinance your home, you’ll need to account for closing costs, which are between 2%-6% of the loan amount. For you to save any money from your lower interest rate, you have to live in your home long enough to break even by gaining more than the closing costs. Calculate your break-even point to ensure it’s not very far in the future that you’re uncertain about your plans.
- You plan to use the savings for discretionary spending: a cash-out refinance lets you take a loan in cash, using your home as collateral. This is a big risk because your lender can foreclose on your home if you default on payments. Don’t put your home on the line for a car or a vacation.
- You’re far along in your mortgage: If you’re at least halfway through your mortgage payment, you might not benefit much from refinancing since a large portion of your payments is going to your principal rather than the interest. Refinancing may restart the clock, and you end up paying more in interest.
- You need to apply for another credit: If you’re planning to apply for another loan or buy a car soon, refinancing isn’t a good move, since it can temporarily dip your credit score.
Refinancing a mortgage, step by step
If, after evaluating your options, you still want to refinance, here are the steps to follow:
- Define your goal: What do you want to achieve by refinancing? Shortening your loan term? Get rid of the FHA mortgage insurance? Reduce monthly payments? Access home equity? Your answer will help you determine whether to move forward with your refinance plans and, if so, which refinance options or products are best for your needs.
- Review your credit: Before applying, check your credit report and FICO score to see whether they’re strong enough to qualify for a new home loan. Creditors with a higher rate secure a lower interest rate (have a credit score of at least 620). Your credit history is a critical factor in qualifying for a refinance.
- Evaluate your equity: You’ll need at least 20% home equity to be able to refinance your mortgage. Your loan-to-value (LTV) ratio should be 80% or lower. The property’s fair market value, determined by a home appraisal, will impact your LTV and available refinance options.
- Shop and compare loan rates and fees: According to the Consumer Financial Protection Bureau (CFPB), it’s advisable to get three or more loan estimates before settling for a mortgage. This allows you a chance to compare repayment terms, interest rates, fees, origination fees, and discount points, as these can affect the total cost of the loan. Be sure to compare offers from each mortgage lender.
- Compare savings and costs: Ensure refinancing makes financial sense before proceeding. If closing costs are $10,000 and you lower your mortgage by $200 a month, it will take 50 months to break even. Unless you plan to stay in the house for that long, you won’t benefit from the refinancing. Refinance calculators can help you estimate potential monthly savings, new monthly mortgage payment, and overall costs.
- Submit your application: Once you choose a loan offer, gather all the documents in advance. Refinancing typically requires the same documentation you provided when you applied for your original mortgage. You will need to provide income documentation, such as recent pay stubs and tax returns, to your mortgage lender. Ask your loan office if you can apply in person, online, or by phone, and request that they guide you through the process.
- Close the loan: You’ll need to meet with your lender to pay closing costs and fees, sign documents, and finalize the closing. You may have the option to refinance with your current lender or choose a new one. Discuss any closing payments on your existing mortgage to avoid missed payments that can damage your credit. The process will result in a refinanced mortgage that replaces your existing mortgage. You’ll then receive an email or letter from your new lender with details of your amount, due date, and other monthly details.
After closing, you will begin making mortgage payments on your refinanced loan, which may include principal, interest, property taxes, and insurance. Most refinance loans can take 30 to 45 days to close, depending on the complexity of the borrower’s finances. As of June 2025, the average time to close on a refinanced mortgage was 44 days.
Ready to Refinance Your Home?
The best time to refinance a mortgage is when your credit score is high enough to qualify for a lower interest rate that will result in savings after recovering the closing costs.
That said, it depends on your goal: if you want to change loan ownership after a divorce or a new marriage, get cash to renovate your home, or have some expense relief by paying less monthly, refinancing can help.
The important thing is to make sure refinancing benefits outweigh the cons of not doing it. Here’s how to get the best refinance rates to save even more from refinancing.
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