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With the Federal Reserve in a holding pattern, there’s no telling where mortgage rates could go this year — or if you’ll be able to reduce your rate through refinancing.
Fortunately, that’s not the only reason you might want to refinance your mortgage loan. In fact, refinancing at other times, even when rates are flat or rising, could work in your financial favor by reducing your monthly payment, giving you access to much-needed cash, or even helping you pay off your loan faster if that’s what you want.
Are you unsure if it’s the right time to refinance your mortgage? Here are six times refinancing is a smart move.
In this article:
When to refinance a mortgage: 6 good reasons
Your particular financial situation will determine whether refinancing makes financial sense.
Good times to refinance a home typically include:
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When interest rates have fallen below your current mortgage rate enough to warrant paying the closing costs of refinancing. This can also give you a lower monthly payment.
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When your credit score has significantly improved since you closed on your home loan. With a higher score, a new loan might earn you a better mortgage interest rate or more favorable loan terms than you currently have.
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When you want a new loan term — either a shorter one to save total interest over the life of the loan (or pay your house off sooner) or a longer one to lower your monthly payments.
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When you want to tap the equity in your home and turn it into cash. You’d do this using a specific type of refinance called a cash-out refinance.
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When you want to eliminate mortgage insurance, which you’d do by refinancing into a new loan type (refinancing from an FHA loan to a conventional one, for example).
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When you want to swap an adjustable-rate mortgage for a fixed-rate loan. Or the other way around.
We’ll dive deeper into each of these scenarios below.
Learn more: The costs of refinancing a mortgage
When to refinance: Interest rates have fallen
The most obvious reason of all to refinance a mortgage is when you can lower your interest rate. For example, if market interest rates fall below the rate on your current loan, you may be able to refinance your mortgage into a lower-rate option. This would, in turn, reduce your monthly payment and save you in long-term interest too.
Be mindful when you start shopping rates among lenders: Refinance rates are often higher than purchase rates — so the advertised rates lenders promote, or the mortgage rates shown in news coverage, may not be the refi rate you'll actually qualify for. Rates can also vary by lender, so it’s important to compare at least a few different refinance companies.
And make sure you’re staying on top of the headlines if you’re eyeing a refinance to lower your rate. If the Federal Reserve is expected to cut its federal funds rate in the near term, it could mean lower interest rates are on the horizon. If it’s not cutting rates (or rates are increasing), mortgage rates could hold steady or rise. The CME Group’s FedWatch tool can help you monitor expectations for upcoming Fed meetings.
Dig deeper: 7 types of home refinancing options
When to refinance: Your credit score has improved
If you've been making timely payments on your mortgage (or on other debts in your name), your credit score may have improved since you bought your house.
Check your current score, and then compare it to the chart below. Each row generally represents an average change in interest rate. For example, from the bottom row to the top row represents a more than 1.5% difference in interest rate. To determine your interest rate savings from an improved credit score, locate the row of your old score, then add the interest rate savings for each row above your original score.
Let’s say your score was in the 620 to 639 range when you bought your house, and it's now in the 680 to 699 range. In this case, you might lower your interest rate by 0.33 percentage points just because your credit score improved.
On a 30-year mortgage for $300,000, the difference in those rates comes to over $20,000 in interest over the life of the loan.
Use the FICO loan savings calculator to run the numbers on your unique credit score.
Yahoo Finance tip: A rising credit score usually means you've also been paying off debt. That will lower your debt-to-income ratio, another primary factor lenders consider. An improved DTI may help you earn an even lower interest rate on your refinance.
Keep reading: How to get the lowest mortgage rate possible
When to refinance: Changing the loan term
Another reason to refinance your mortgage is to get a shorter term. For example, you might refinance your loan from a 30-year term to a 15-year one. Shorter-term loans typically charge lower rates, so maybe you save 75 basis points from refinancing from a 30-year mortgage with a 6.75% rate to a 15-year one with a 6% rate.
This is a long-term wealth-building strategy. For example, on that $300,000 mortgage loan we mentioned above, your monthly mortgage payment would increase by about $586, but you pay off your home in half the time. And save almost $180,000 in interest.
And it doesn't have to be from 30 years to 15. You might run the numbers on moving from a 30-year loan term to a 20-year term. Or, if you're a FIRE (financial independence retire early) advocate, look at going from 30 to 10.
You might also consider extending the loan term under some circumstances. Perhaps you want to lower your monthly payment to get some breathing room in your budget. In this case, you might take your current 30-year loan and refinance it into a new one, spreading your balance out over even more months. Then, you might use the monthly savings to pay off some high-interest debt or achieve other financial goals you’re eyeing.
When to refinance: Tapping the equity in your home
When property values increase or you've paid down your mortgage enough to gain some equity, you may want to explore a cash-out refinance and turn that equity into cash.
With a cash-out refinance, you replace your original mortgage loan with a new one with a large balance. That one pays off your current loan, allowing you to pocket the difference and put the cash toward anything you like.
Keep in mind that if current refinance rates are higher than your existing mortgage rate, you might skip a cash-out refi and consider a home equity line of credit or home equity loan instead. Since HELOCs and HELs are second mortgages you take out in addition to your main mortgage, you wouldn't lose the lower interest rate on your existing loan as you would with a refinance.
Dig deeper:
When to refinance: Eliminating mortgage insurance
If you have an FHA mortgage, then you pay a mortgage insurance premium as part of your monthly payment. While it can’t be canceled for most borrowers, you can get rid of FHA mortgage insurance by refinancing into a conventional loan.
The catch? You’ll need to wait until you have at least 20% equity in your house (meaning your loan balance is 80% or less than your home’s value). If you try to take out a conventional loan earlier than this, you’ll owe the conventional version of mortgage insurance — called PMI.
If you already have a conventional loan and your lender is paying for your PMI (typically in exchange for a higher interest rate), you will need to refinance to get rid of it once you hit 20% equity. If you pay the PMI yourself, you can request that your lender cancel the PMI when your home reaches 20% equity, or it will be dropped automatically once your balance falls to 78% of your home’s value.
When to refinance a mortgage: Swapping ARMs and fixed-rate loans
There can be strategic reasons to refinance from an adjustable-rate mortgage (ARM) to a fixed-rate loan or vice versa.
You might want to lock in a lower long-term rate or payment
Let’s say you snagged an adjustable-rate mortgage when interest rates were moving higher, but now that the intro rate period has ended, you see that fixed rates are lower than what your new adjusted rate would be. That's when you might consider refinancing from an ARM to a fixed-rate mortgage so you can lock in a lower rate for the long haul.
You might want to refinance if your ARM rate is rising to the point that your monthly payment is a financial strain. In this case, you could refinance into a fixed-rate loan with a stable rate and payment. You could also extend your loan term if you need a smaller monthly payment.
You may want to take advantage of falling rates
The opposite could be true as well. You might currently have a fixed-rate loan at an interest rate slightly higher than you like. As interest rates fall, introductory ARM rates often drop too.
An ARM may be a great solution if you only plan to stay in your house for a couple more years. In this case, consider refinancing your loan to an ARM with a low introductory rate period roughly matching the time you'll stay in the house. Then, when you move to a new place, you can see how interest rates look and think about returning to a fixed-rate loan for your next home.
One important note: Introductory ARM rates aren't always lower than fixed loan rates. Before taking out an adjustable-rate mortgage, compare a few lenders for the best rate.
Read more: Adjustable-rate vs. fixed-rate mortgage — which should you choose?
If you have a government-backed loan, refinancing is even easier
FHA loans have special incentives for homeowners looking to refinance. So do VA mortgages, which are for borrowers with a military connection, and USDA loans, which serve low-to-moderate-income borrowers buying in rural areas. All three government-backed mortgages offer "streamline" financing, meaning less paperwork and a faster turnaround time.
Streamline refinance programs have certain restrictions, so talk to a lender who specializes in FHA loans, VA loans, or USDA loans to find out your options.
Learn more:
What else to consider when refinancing your home
Think you're ready to refinance? Make sure it's a good time for you to exchange your mortgage for a new one by considering these important timeframes:
The holding period of your mortgage. Some types of home loans require you to wait for a period of time before refinancing. Mortgage holding periods can vary by loan type and lender, ranging from six months to 210 days.
Learn more: How soon can you refinance a mortgage after buying a home?
What is your break-even period? According to Freddie Mac, the average cost of a refinance is around $5,000. (Although it depends on several factors, such as your home value and location.) When you are ready to explore a refinance, determine how much it will cost you and then calculate your break-even period — or the point at which the refinance will save you more than it costs up-front.
Here's how: Take your total closing costs and divide them by the monthly savings gained by refinancing to a lower mortgage payment. For example, if you save $250 monthly on your payment and pay $5,000 in closing costs, it will take 20 months to break even (5000 / 250 = 20). If you won’t be in the home for 20 months or more, the refinance doesn’t make financial sense.
When do you think you might want to move again? The timing of your next move plays a big role in the viability of a refinance. You certainly don't want to refinance if you'll be relocating before the end of your break-even period.
Is this a good time for you financially? This requires a review of your personal finances, long-term financial goals, and quality-of-life decisions. Do you have a good job, aren't looking to relocate soon, and have a good refinance strategy in mind? It might be time to replace your current loan.
Dig deeper: The pros and cons of refinancing your mortgage
When to refinance a mortgage FAQs
At what point is it not worth it to refinance?
A refinance is likely not worth it if the financial benefit is lower than the refinancing costs. A refi can be a waste of time and money if you move before you hit the break-even point on closing costs. Also, if you add more years to your payoff, you'll be in debt longer and paying more interest. That's not a great wealth-building plan.
How often can you refinance?
You can refinance a mortgage as often as a lender approves your application. There is no limit imposed by governmental authorities. Sometimes, there are seasoning requirements, which means you must wait a certain amount of time between taking out your loan and refinancing it.
How long should you have a mortgage before you refinance?
Typically, you will need to be in your home six months to one year prior to refinancing. Some government loans have even longer "seasoning" times. However, certain types of loans have no waiting period. Ask your lender for details regarding your specific loan.
What is the downside to refinancing?
The biggest downside to refinancing is usually the closing costs, which can be 2% to 6% of the new loan amount. A temporary hit to your credit score is also a possibility. Extending the loan term and paying more interest can also be a negative outcome.
How much does it cost to refinance?
Closing costs range from 2% to 6%. So, on a $300,000 mortgage, that can be from $6,000 to $18,000. Closing costs on a cash-out refinance may be higher.
How do you calculate if it’s worth it to refinance?
You should calculate your break-even point to determine if refinancing is worth it. To do this, take the total closing costs for the refinance and divide that number by the monthly savings your refinance would net you. The answer will tell you how many months it will take to “break even” on your closing costs. If you don’t plan to stay in your home until that point, refinancing likely isn’t worth it.
This article was edited by Laura Grace Tarpley.
