Should You Refinance Your Mortgage? Here’s How to Know

Refinancing your mortgage can help you save money, lower your monthly payments, or pay off your home faster. But is it the right move for you? If you’re wondering whether you should refinance your mortgage, this guide will break down the key factors, benefits, and risks to help you make an informed decision.

What Is Mortgage Refinancing?

Refinancing a mortgage means replacing your existing loan with a new one, often with better terms. Homeowners typically refinance to:

Secure a lower interest rate
Reduce their monthly mortgage payment
Change from an adjustable-rate mortgage (ARM) to a fixed-rate loan
Shorten their loan term, such as going from 30 years to 15 years
Access home equity through a cash-out refinance

While refinancing can be beneficial, it’s important to weigh the costs and savings to determine if it’s the right choice for you.

Signs That You Should Refinance Your Mortgage

1. Interest Rates Have Dropped

One of the most common reasons to refinance is to take advantage of lower interest rates. Even a slight reduction in your rate can lead to significant savings over time.

Example:

A $300,000 mortgage at 6.5 percent interest costs about $1,896 per month.
Refinancing to 5 percent would lower the payment to $1,610 per month, saving $286 per month or $103,000 in interest over 30 years.

Rule of Thumb: If rates have dropped at least 1 percent below your current rate, refinancing may be worth considering.

2. You Want to Lower Your Monthly Mortgage Payment

If your mortgage payment is too high or you need more financial flexibility, refinancing can help by reducing your interest rate or extending your loan term.

Before Refinancing:

Check if extending your loan term increases your total interest paid over time.
Compare closing costs to ensure long-term savings.

3. Your Credit Score Has Improved

A higher credit score can qualify you for better mortgage rates. If your credit has improved since you first took out your home loan, refinancing could help you secure a lower rate and better loan terms.

How to Check:

Review your credit report for errors.
Pay down credit card balances to improve your score before applying.

A credit score of 740 or higher typically qualifies for the best mortgage rates.

4. You Want to Pay Off Your Mortgage Faster

If your goal is to be mortgage-free sooner, refinancing into a shorter loan term can help you save thousands in interest payments.

Example:

A 30-year mortgage of $250,000 at 6 percent interest results in $289,595 in total interest.
A 15-year mortgage at 4.5 percent interest results in only $94,868 in total interest.
Total savings: Nearly $200,000.

This option is best for homeowners who can afford slightly higher monthly payments in exchange for long-term savings.

5. You Need Cash for a Major Expense

A cash-out refinance allows you to borrow against your home’s equity and use the money for:

Home renovations
Debt consolidation
College tuition

This option works best for homeowners with substantial equity who need extra funds. However, using a cash-out refinance increases your mortgage debt, so it should only be used for essential financial needs.

When Refinancing Might NOT Be a Good Idea

You Plan to Move Soon: If you plan to sell your home within the next three to five years, refinancing costs may outweigh the benefits.
You Have a High Loan-to-Value (LTV) Ratio: If you owe nearly as much as your home’s current value, you may not qualify for refinancing.
Your Credit Score Is Low: A lower credit score could result in higher interest rates, making refinancing less beneficial.
Refinancing Costs Are Too High: Closing costs typically range from two to five percent of the loan amount. Use a refinance calculator to determine if refinancing will actually save you money.

How to Refinance Your Mortgage in Five Steps

Check Your Credit Score – The higher your score, the better your refinancing options.
Compare Lenders and Loan Offers – Shop around for the lowest interest rates and best terms.
Calculate the Break-Even Point – Ensure that the savings will outweigh the refinancing costs.
Submit Your Application – Provide financial documents for lender review.
Close on Your New Loan – Sign final paperwork and begin making payments on your refinanced mortgage.

Final Thoughts: Is Refinancing Right for You?

Refinancing can be a great financial move if you:

Can secure a lower interest rate
Want to reduce monthly payments
Plan to pay off your home faster
Need to access home equity for important expenses

However, if you plan to move soon, have a low credit score, or the refinancing costs are too high, sticking with your current mortgage may be the better choice.

Next Steps

Interested in refinancing? Check out today’s best mortgage refinance rates and see how much you could save.