When should you refinance your mortgage?

Refinancing a mortgage is when you take out a new home loan to replace your current one. If you bought your home when interest rates were higher than now, refinancing could be a way to save on your monthly mortgage payments or how much you pay in total interest over the life of your loan.

But refinancing takes some work. It’ll cost you some upfront charges, like closing costs, and you’ll need to complete a lot of paperwork, just like a traditional mortgage. Still, refinancing might be worth the time and money if you can get a lower interest rate than what you’re paying right now or use the extra funds you’re pocketing to pay for a large expense. If you can’t secure a low mortgage interest rate, there’s a chance you could pay more if you refinance too soon.

What to know before refinancing

When you refinance your mortgage, you replace your current home loan with a new loan. You’ll get a new mortgage with a new interest rate and repayment terms, and you could get a new lender with a new monthly payment due date. Once approved for refinancing, your new lender pays off your old loan. Then you’ll start making payments on your new loan.

As you’re exploring refinancing, think about all the details it could affect, including:

• Interest rates. Compare your current interest rate to what’s out there today. You can find your rate on your most recent mortgage statement, if you aren’t sure what you’re paying. If interest rates are higher than what you’re paying right now, refinancing would mean you’d end up paying more and wouldn’t save money.

• Upfront costs. Refinancing comes with closing costs, which can cost you upward of 6% of the loan amount. Do the math to see if you can afford the refinance costs. Some lenders and loans allow you to roll those costs into your loan, but you’ll pay interest on them down the road.

• Long-term plans. Refinancing might make more sense if you’re considering staying in your home for the next few years. But if you’re moving soon, you may not recoup those refinancing costs quickly enough. Calculate your break-even point — or when your savings start to outweigh your costs of refinancing.

Before starting the refinancing process, ensure your credit score and history are in the best possible shape. Like the homebuying process, underwriters comb through your financial documents, employment information and personal details. It’s important to check your history before a potential lender does and clear up any mistakes before you complete an application.

Dig deeper: 5+ ways to get the lowest rate on your next mortgage

When it’s worth it to refinance your mortgage

Refinancing your mortgage can result in huge financial savings. Think about refinancing your mortgage if:

• You can secure a lower interest rate. Getting a better interest rate than what you’re paying now is among the biggest reasons to refinance your mortgage. Find a current rate that’s at least 1 percentage point lower than what you’re paying now. It may help to use a mortgage refinance calculator to figure out monthly payments.

• You want to change your repayment terms. You should refinance if you want longer terms to lower your monthly mortgage payment or shorter terms to pay off your loan sooner. But you’ll want to make sure you’re lowering your interest rate overall. If you can’t, you might want to make larger monthly payments or make an extra mortgage payment every year to try to pay off your loan sooner.

• It gets rid of private mortgage insurance. If your home value has gone up, there’s a chance refinancing your home could get rid of PMI sooner. Dropping PMI lowers your monthly payments.

• You need the extra cash. If you’re making major home improvements or repairs, paying for a large purchase or otherwise need a large chunk of change, refinancing might be your chance to get access to funds.

Dig deeper: How much does a 1% change in rates actually matter? (Hint: More than you think)

When you should not refinance your mortgage

Refinancing isn’t always right for everyone. It may not be the best idea to refinance if:

• You’ve paid too much already. If you’re halfway through your current mortgage terms, you may not see much benefit to refinancing. Most of your monthly payment now goes to the principal balance, not the interest. Refinancing would mean you start paying the bulk of interest every month.

• You’re moving. Refinancing may not make much sense if you plan to move within the next few years. You may not get back much of those upfront closing costs you shelled out, and you’ll need to pay for home-selling expenses and fees.

• Interest doesn’t go down. Interest rates aren’t guaranteed to go down when you refinance (but it’s definitely preferred if they do). Unless you’re under special circumstances — like you and your spouse are divorcing, so you’re refinancing a home loan into one partner’s name — avoid refinancing if you can’t get a lower interest rate.

• You can’t afford it. Whether it’s the upfront closing costs or the monthly payments, make sure you can afford the refinancing costs. If not, you may want to skip refinancing.

How much can you save by refinancing?

Refinancing savings vary based on many factors, including the refinancing you choose, your new interest rate, your new loan amount, your credit score and history (and that of your cosigner, if you have one) and your upfront and closing costs.

Let’s say you currently pay $1,800 per month for your home loan with a 7.75% interest rate, with $250,000 and 25 years left on your mortgage. Here’s how your existing mortgage would compare to a new 30-year mortgage at a 6.5% interest rate.

By refinancing, you’d save about $220 on your monthly payments and nearly $30,000 in interest payments over the life of the loan, and it would take you about three years to recoup the closing costs. If you plan to be in the house that long, it could benefit you to refinance.

Should I refinance to a 15-year mortgage to lower my interest rate?

If you're able to take on the higher monthly payments that come with a 15-year mortgage, a shorter loan term could be worth it for the interest savings alone. But you'll want to be sure you can afford the higher payments with enough wiggle room to balance your other financial priorities.

Here’s a comparison of different loan terms at a handful of interest rates for a $300,000 loan:

Alternatives to refinancing

The type of refinancing you choose determines how much you could save. But refinancing isn’t the best option for everyone. You may want to explore other options, like:

• Home equity loans. With a home equity loan or line of credit (HELOC), you take on an additional loan or line of credit rather than replace your mortgage. If you have a stellar interest rate right now and need cash for a large or unexpected expense, tapping into your home equity might be a better choice.

• Mortgage prepayments. If your goal is to pay off your home sooner, consider making an extra monthly home payment. Or think about making larger monthly payments throughout the year. If you can, try biweekly payments or make two monthly payments. Have your first payment go toward your usual principal and interest and then make another one mid-month that only goes toward the principal balance. Finding little ways to pay down your home throughout the year can make a big difference in the long run — and helps you build valuable home equity faster.

• Reverse mortgage. A home equity conversion mortgage — or reverse mortgage — is designed for homeowners ages 62 or older. You borrow money from your home’s equity as a loan, but no monthly payment is required. Instead, the lender is paid when you no longer live in the home, whether you sell the home or die.

Dig deeper: What happens to your mortgage after you die?

FAQ: Mortgages, refinancing and paying down your home loans

Find answers to some of the most common questions about mortgages, home loans and refinancing.

Can a cosigner help me get a lower mortgage rate?

They might. A cosigner is someone who agrees to take legal responsibility for the loan along with you, and having one can help you get all-around better terms on your mortgage — including a lower interest rate. Though keep in mind that even if your cosigner has stronger credit than you do, most lenders default to the lowest credit score among applicants when determining your mortgage rate. Learn more about cosigning car, home and other personal loans with loved ones — including the risks and the rewards.

Is it better to get my mortgage from a bank or a credit union?

Banks are a popular choice for mortgages, with big brands offering mortgage options that range from conventional fixed-rate mortgages to government-backed loans and jumbo loans. But if you’re able to join a credit union, you might find lower interest rates, lower fees and even relationship discounts that come with membership. Shop around with at least three mortgage lenders, including a mix of banks and credit unions, to find the best refinance rates and terms for your budget.

What happens to my mortgage after I die?

Mortgages are treated differently from other debts, but how you write your will and set up your estate plan can make a big difference in what happens to your mortgaged home after you die — and how much of an asset you’re able to leave for your surviving family. Learn more in our guide to mortgages after a death — including steps you can take to avoid complications for your loved ones.

I want to give a down payment to a loved one. Will I need to pay a gift tax?

For tax year 2024, the IRS excludes gifts of up to $18,000 from gift taxes per recipient. “Per recipient” is key, because it means you can gift up to $18,000 to each of your children in a tax year, for example, without triggering the gift tax. And if you’re married, both you and your spouse can gift up to $18,000 to the same recipient for total gifts of up to $36,000 per recipient. Talk with a tax professional or a trusted retirement advisor if you’re gifting more than the allowable amount or looking for other ways to minimize your tax liability.

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About the writer

Dori Zinn is a personal finance journalist with more than a decade of experience covering credit, debt, investing, real estate, student loans, college affordability and personal loans. Her work has been featured in the New York Times, the Wall Street Journal, Yahoo, Forbes and CBS News, among other top publications. She loves helping people learn about money.

Article edited by Kelly Suzan Waggoner