When should I refinance my mortgage?

This is a big decision, as refinancing is essentially taking out a new home loan to pay off your old one. It’s not free, as you’ll incur closing costs much like you did when you bought your home. So, we’ll help you evaluate when it’s a good time to refinance your mortgage—and when it may be best to leave it alone.

---

---

Pros and cons of refinancing your mortgage

Pros	Cons
Potentially secure a lower interest rate	There will be closing costs
Potentially lower monthly payment	Requirements to qualify
Jettison private mortgage insurance sooner	Potentially more total interest
Tap home equity if needed	Touching your home equity might jeopardize future finances

Potentially secure a lower interest rate
Cons	There will be closing costs
Potentially lower monthly payment
Cons	Requirements to qualify
Jettison private mortgage insurance sooner
Cons	Potentially more total interest
Tap home equity if needed
Cons	Touching your home equity might jeopardize future finances

Reduce your interest rate 

Mortgage rates fluctuate regularly. If rates decrease below the annual percentage rate (APR) you signed for when taking out your mortgage, refinancing may lower your interest rate. Depending on the spread—and the amount you owe on your home—refinancing could potentially save you tens of thousands of dollars. 

As an example, let’s say you’ve got 15 years left on your mortgage to pay $200,000 with a 7.90% APR. If you refinance to a mortgage with 6.35% APR and keep the same term, you might save more than $30,000 in interest—perhaps substantially more, depending on early or far along you are in the repayment term. 

Still, there are other costs you’ll incur when refinancing a mortgage, which we’ll cover in a minute, so just know not all of those apparent savings will go back in your pocket. 

Eliminate private mortgage insurance 

Private mortgage insurance (PMI) is often required of homeowners who don’t put at least 20% down when buying a home (though there are exceptions). Its purpose is to give your lender protection in case you default on your mortgage. 

PMI generally costs between 0.58% and 1.85% of your loan amount. Depending on the size of your loan, this can potentially result in hundreds of dollars per month. You can ask your mortgage servicer to cancel your PMI when you’ve paid off 20% of the original value as of when you bought the home. 

However, if your home has appreciated significantly, there may still be a benefit to refinancing your mortgage before then. For example, from factors such as economic growth or home renovations, your home may be worth considerably more than when you bought it. You may achieve 20% equity long before you pay off 20% of your mortgage. In this case, refinancing can help you skirt years of PMI payments (though you may also be able to simply get your home reappraised, as well). 

That said, you shouldn’t expect to fix up your home and refinance within just a few months. “If you refinance within a year of purchase, the financing is typically based on the purchase price, even if the property has appreciated,” notes Sarah DeFlorio, Vice President of Mortgage Banking at William Raveis Mortgage. “At a year and a day, however, the refinance can be based on the appraised value.” 

Modify your mortgage term 

When you refinance your mortgage, you can choose to change your loan term to better fit your current finances. Depending on your goals, tweaking your term can lower your mortgage payment or reduce your total interest payments.

For example: If you’ve got a 15-year term, you may switch to a 30-year term to dramatically reduce your monthly payment and give your budget a bit more breathing room. Or, if you’ve got a 30-year term but would like to build equity faster—and lower the interest you pay over the life of the loan—you may choose to refinance to a 15-year term. 

Change your mortgage type 

Refinancing gives you the ability to benefit not just from different interest rates and term lengths but from entirely different mortgage types. Your situation may now be better served by swapping your current mortgage structure. 

You may have opened an adjustable-rate mortgage for a low introductory APR but now want a fixed-rate mortgage with predictable interest. Refinancing can give you just that. 

Borrow from your equity 

If you’ve got considerable high-interest debt or a large expense that you don’t think you’ll realistically be able to pay off right away—think medical bills, major home renovations, etc.—a cash-out refinance could be a reasonable option. 

With a cash-out refinance, you can take out a mortgage for more than you owe on your home and pocket the difference, effectively liquidating a portion of your equity. It’s not “free” money; your loan size will increase, and you’ll pay more in interest over the life of the mortgage than you would on a smaller loan. But it can be a handy way to get cash when you really need it. 

How to decide when to refinance your mortgage

Low interest rates 

Perhaps the most obvious (and most compelling) reason to refinance your mortgage is for lower interest rates. There isn’t a one-size-fits-all magical formula to help you know when refinancing is an obvious choice. That said, “Many of my clients feel that a 2.00% drop in rates is the appropriate time to refinance—but it’s always specific to the individual,” says Sarah DeFlorio. 

Another benchmark you may hear is that it’s worth considering a refinance if you can score a rate at least a full percentage point lower than what you’ve got now. 

You’ll have to crunch the numbers to decide whether your savings in interest will handily offset the closing costs and other fees that come with a mortgage refinance.  

Mortgage loan officer and financial educator Jennifer Beeston recommends paying attention to mortgage discount points as an indicator as to whether refinancing your mortgage makes sense. In short, discount points are extra fees you can pay upfront in exchange for lowering your interest rate. 

“I would always be cautious with discount points,” Beeston says. “If a lender is trying to sell you on a refinance that will cost you multiple discount points, odds are refinancing right now does not make sense. If you can lower your rate substantially and not have to buy discount points, that is a no-brainer sign it’s time to refinance.” 

Credit health 

Even if interest rates don’t lower, it’s conceivable that you could get a significantly better interest rate with an improved credit score. 

As an example, let’s say you took out a mortgage with a credit score in the low 600s. If your credit score is now in the high 700s, you might be able to refinance and snag an interest rate a percentage point or more below your current rate. That could possibly translate into a six-figure savings, depending on the size of your loan. 

Militarize your equity toward other investments 

Dropping interest rates are far from the only reason to refinance your mortgage.  

“Typically, investors and homeowners try to time a refinance around interest rate shifts, while seasoned investors might also consider a cash-out refinance if their property has gained equity,” says Yuval Golan, founder and CEO of real estate financing platform Waltz. “They can refinance again later if interest rates change to secure better terms, but in the meantime, they can leverage their equity for additional properties, renovations, and more.” 

All to say, you may decide to refinance for the purpose of using those funds to make money elsewhere. 

---

---

What you need to refinance your mortgage

Credit score 

Different types of mortgage refinance options may have specific credit score requirements. For example, you’ll commonly find requirements like this for certain loan types: 

• Conventional loan: 620 or better 
• FHA loan: 580 or better 
• VA loan: 620 or better  
• USDA loan: 580 or better 
• Jumbo loan: 680 or better 

Equity-to-loan value ratio 

Many lenders won’t allow you to refinance your mortgage if you’ve got less than 20% equity, But similar to the credit score requirements, this can vary depending on the type of refinance you’re performing. 

Debt-to-income ratio 

In short, your debt-to-income (DTI) ratio is your monthly debt payments—think mortgage, auto loan, credit cards, etc.—divided by your gross income. Many lenders require your DTI to be 43% or lower, though there are exceptions. 

Relevant documents 

When applying for a mortgage refinance, expect to bring the following paperwork for a smooth process: 

• W-2s for the previous two years 
• Pay stubs for the previous 30 days 
• Bank statements for all your financial accounts 
• Monthly mortgage statement, as well as statements for a home equity loan or HELOC (if you’ve got one) 

If you’re self-employed, you’ll need a copy of the previous two years of tax returns, as well as a recent profit/loss statement (quarterly or year-to-date). 

What to watch out for when refinancing a mortgage

Pushy loan officers 

“Watch out for high-pressure sales,” says Jennifer Beeston. “If it feels like the loan officer is being really aggressive and pushing you hard to refinance, take a step back and get a second and third opinion.” 

She also notes the alarming number of predatory loan officers in the refinance space. “It’s really scary for consumers. I hear the wildest stuff every day, and we see loan estimates where people are just having their equity stripped.” 

Frequently overlooked fees 

Similar to taking out a regular mortgage, refinancing your mortgage typically comes with application fees, origination fees, appraisal fees, document preparations, and more.

Yuval Golan recommends that borrowers look beyond APR to account for prepayment penalties, cash-out limits, title costs, legal fees, and more. He adds: “International investors often face additional layers, such as currency transfer fees, compliance requirements, and even travel or local representation costs that aren’t obvious at first.”

Among the litany of standard fees, be sure the lender you’re working with doesn’t tack on opaque charges.

The promise of “free” refinance offers 

Again, refinancing your mortgage is far from free. “Watch out for free refinance pitches,” warns Beeston. “In the last few years, we had quite a few lenders tell people if they refinance with them they would do it for free. This does not mean you’re going to get a better deal.” 

“One of the biggest issues I am seeing right now is loan officers who are selling homeowners on a low rate without explaining the cost to get that rate,” she says. “They use sales language like ‘skip two payments’ or ‘you bring in no money.’ Both of those statements are a red flag that you were working with the sales person instead of a mortgage expert. 

Refinance mailers 

“Watch out for the refinance offers you get in the mail—they are all nonsense,” Beeston says. “They advertise teaser rates that do not apply to your unique situation, and by the time you receive the mailer, that rate is already expired. Mortgage rates change every single day and until your rate is locked by the lender it is not guaranteed.” 

Alternatives to refinancing your mortgage

Depending on your purpose for mortgage refinancing, other options may be able to accomplish a similar result. 

For example, if you want to lower your monthly payment, you may consider: 

• Mortgage recast: When you make a considerable payment on your mortgage, your lender may agree to recast your loan according to your new lower principal balance. In other words, you’ll keep the same loan term and pay smaller monthly installments instead of simply paying off your mortgage early. 
• Loan modification: You may be able to extend your loan term—resulting in a lower monthly payment—without refinancing your mortgage, via what’s called loan modification. This option is made available to those with qualifying financial hardship. 
• Reverse mortgage: Those aged 62 and above may be able to avoid a monthly mortgage payment by taking out a reverse mortgage. The bank will require repayment of the loan when you move, sell your home, or die. 

Or, if your primary goal is to access your home’s equity, you may choose: 

• Home equity loan: You can borrow from the equity you’ve built in your home in installments.  
• Home equity line of credit (HELOC): You can borrow from your home equity on a rolling basis, similar to a credit card. There is typically a “draw” period attached to a HELOC, after which your borrowing power will cease and you’ll be required to repay your outstanding balance. 

For home equity loans and HELOCs, lenders typically require that you keep 15% to 20% equity in your home—so you’ll need more than that to begin borrowing. For example, if you’ve got 35% equity, you may be able to borrow 15%. 

---

---

The takeaway

No matter how favorable the market looks, refinancing your mortgage isn’t a slam dunk for every situation. You must weigh factors such as the spread between your current interest rate and the market rate, your credit health, and any other developments to your financial situation that may affect the advantage of taking out the loan.

Watch out for hidden fees, beware of aggressive loan officers, and ignore “personalized” mortgage refinance mailers. If you’re happy with the lender who issued your mortgage, consider staying with that institution to handle a refinance.

Frequently asked questions

Is refinancing worth it if rates have only dropped slightly?

Refinancing your mortgage can be worth it if rates have only dropped slightly. There are other factors that may play into whether refinancing is a good idea, such as an improved credit score or a financial strategy to invest some of your home equity.

What are the costs of refinancing a mortgage?

Refinancing a mortgage can potentially cost a whopping 3% to 6% of your loan amount. You’ll typically need to factor in payments for things like appraisal fees, credit report fees, tax and title services, underwriting fees, and more.

Should I refinance from a 30-year to 15-year mortgage?

You may decide to refinance from a 30-year mortgage to a 15-year mortgage if you’d like to save on interest over the life of the loan. Just note that, depending on the amount you owe, your monthly mortgage payments can be expected to increase.

What credit score do I need to refinance my mortgage?

The credit score you need to refinance your mortgage depends on the type of mortgage refinance and the specific lender. For example, an FHA loan refi doesn’t always come with a minimum credit score requirement—but some lenders demand a 580 score or higher.

How long does the mortgage refinancing process take?

From submitting your application to processing and underwriting to loan approval and closing, the process might take about 30 to 45 days.