When Should I Refinance My Mortgage?
Regardless of the rate environment, knowing when to refinance your mortgage stems from one basic question: Will a mortgage refinance save you money? If the answer is no, chances are you’ll want to wait until you’re in a better place financially or rates have dropped enough to make it worthwhile. If the answer is yes (or if you want to tap your home equity), we’ll help you understand the nuances to make sure it’s the right move for you.
Key takeaways
- If you’re looking for better loan terms or want to access your home equity, a mortgage refinance can be beneficial.
- Refinancing could help you lock in a lower mortgage rate if your credit score has increased since you first bought your home.
- You may want to hold off on refinancing if you plan to sell your house soon or your lender charges a prepayment penalty.
When should you refinance your mortgage?
You’ve significantly improved your financial profile
To refinance into a mortgage with better terms, you’ll need to be on better financial footing than when you took out your existing loan. For example, maybe you paid down debts or increased your income — both of which can positively impact the three major factors that determine mortgage rates: your credit score, loan-to-value (LTV) ratio and debt-to-income (DTI) ratio.
The best interest rates are typically reserved for those with:
- At least a 780 credit score
- A maximum 75% LTV ratio
- A maximum 35% DTI ratio
If your credit score has increased since buying your home, refinancing could help reduce your interest rate and, therefore, your monthly mortgage payments.
To illustrate this, let’s take a look at an example of how a higher credit score could affect a borrower’s monthly payments. We’re assuming the borrower currently has a $300,000 loan amount at an 8% mortgage rate.
If the borrower has at least a 620 credit score when they apply for a refinance, they could drop their rate to 7.35% and reduce their monthly mortgage payment by $134. However, a score of 720 or better would land them at a 6.94% rate and keep an extra $217 in their pocket each month — more than $80 in additional savings.
| Credit score range | Interest rate | Monthly payment savings |
|---|---|---|
| 720+ | 6.94% | $217 |
| 680-719 | 7.22% | $161 |
| 660-679 | 7.33% | $138 |
| 640-659 | 7.39% | $126 |
| 620-639 | 7.35% | $134 |
Note: These numbers and rates are based on a hypothetical refinance scenario, using the average interest rate offered to customers seeking a 30-year fixed-rate mortgage refinance on the LendingTree platform by credit tier during the month of October 2024. This does not include fees.
Don’t know your credit score? Get your free score on LendingTree Spring today.
Interest rates have dropped
Let’s say you took out a $350,000 home loan last year with a 7.20% rate and a 30-year term. After checking recent refinance rates, you noticed you could get the same loan for just 6.18%.
Here’s how the interest rate change between September 2023 and 2024 could impact your monthly payment:
| Month and year | Interest rate | Monthly payment |
|---|---|---|
| September 2023 | 7.20% | $1,901 |
| September 2024 | 6.18% | $1,711 |
Refinancing would lower your monthly payment by $190.
You can shorten your loan term
If your income has increased and you can afford to pay off your mortgage sooner, it might make sense to refinance into a shorter-term mortgage.
The caveat: While you can secure a lower mortgage rate with a shorter loan term, you’ll have a higher monthly payment since there’s a shorter amortization schedule. Be sure your budget can handle the higher payments.
See your 15-year mortgage loan rates and offers.
You need to switch your loan type
Whether you have an adjustable-rate mortgage (ARM) and want the stability of a fixed-rate loan, or you’d like to switch from an FHA loan to a conventional loan, you’ll need to refinance to make the change.
Good reasons to switch your loan type include:
- Getting out of an ARM before its rate adjusts. Interest rates on ARMs can rise by quite a bit when they adjust. Getting out of an expensive ARM, or getting out before the rate adjusts, could save you a great deal in interest costs.
- Getting rid of FHA mortgage insurance. If you took out an FHA loan and put down less than 10%, you’ll pay mortgage insurance premiums for the life of the loan. Refinancing into a conventional loan allows you to get rid of that extra monthly cost. Keep in mind you’ll still have to pay for private mortgage insurance (PMI) if you don’t have the minimum 20% home equity needed to avoid it.
Have a look at today’s FHA mortgage rates.
You want to tap your home equity
Perhaps you need to fund home improvements, cover college costs, consolidate debt or handle an unexpected emergency. A cash-out refinance can help with those goals, but you’ll usually need at least 20% equity to qualify.
Here’s an example: Your home is worth $300,000 and you owe $100,000 on your existing mortgage, giving you $200,000 in equity. With an equity-tapping loan option, you could potentially convert up to $155,000 of that equity into cash and spend it however you wish.
Use a home equity loan calculator to see how much cash you can access.
When should you wait to refinance your home loan?
Refinancing your home doesn’t always make financial sense, especially if you plan to move within a few years or have bad credit. A mortgage refinance isn’t a good idea in the following scenarios:
- You’re selling your home soon. One of the most important calculations in a refinance is your break-even point. If you don’t stay in your home long enough to recoup your refinance closing costs, you could end up losing money.
- You’re close to paying off your existing loan. If you’re in the home stretch of a mortgage payoff, starting the clock over with a new, long-term loan means you’ll pay significantly more in interest charges. Consider sticking it out or choosing a shorter repayment term to achieve your refi goals.
- Your credit score is struggling. A not-so-great credit score can bump up the refinance rate you’re quoted and cost you more money in the long run.
- You need to focus on other financial goals. If the money you’ve set aside to refinance your mortgage could be used to pay down high-interest debt or beef up your emergency fund, consider prioritizing those goals first.
- You could face a prepayment penalty. Some lenders charge you a hefty fee — known as a prepayment penalty — if you pay off your loan in the first few years of borrowing it. You can find out whether your existing loan terms include a prepayment penalty by checking your closing disclosure.
- You just want access to cash, and you haven’t evaluated whether a cash-out refinance, home equity loan or home equity line of credit (HELOC) would best suit your needs. Make sure you take the time to fully understand and consider refinance alternatives before you jump into a new loan.
Is now a good time to refinance?
The Federal Reserve made its first rate cut of 2024 in late September and a second cut in November. However, rates haven’t plummeted and home affordability is still quite low. If you’re waiting for mortgage rates to fall, you may want to keep an eye on the mortgage rate forecast so you’ll be ready to refinance once the market is in a better place.
A mortgage refinance calculator can help you crunch the numbers on how much the refinance will cost versus how much it will save you in the long run.
Expert insights on refinance rates this month
Senior economist |
“Refinancing a mortgage can be a great way to lower both your monthly payments and reduce the amount of interest you pay over the lifetime of your loan. This is especially true if you have strong credit, aren’t planning to move in the immediate future, are willing to shop around to compare offers from different lenders and can get approved for a loan with a rate that’s 50 to 100 basis points lower than the one you currently have.” |
Thinking about refinancing but are uncertain about the process? Read our step-by-step guide on how to refinance your mortgage.
What should you consider before refinancing your home?
How long do you plan to stay in your home?
If you’re selling your home in a few years, refinancing may not benefit you as much as you think. It’s important to calculate your break-even point to determine how much time it’ll take you to recoup your closing costs. For example, if you paid $7,000 in refinance closing costs, and your monthly savings are $300, it would take you about two years to break even. If you plan to move or sell before then, a refinance may not make sense for you.
What’s the current interest rate environment?
Mortgage rates are unpredictable — but if they’ve dropped enough to give you the savings you’re looking for in a refinance, you might want to act quickly.
How many years are left on your existing loan?
If you have 20 years left on your current mortgage and decide to refinance into another 30-year loan, you’re restarting your repayment term and significantly increasing the interest you’ll pay over the life of the loan. Try refinancing to a shorter term if your budget can handle it.
Is there room for improvement in your credit score or DTI ratio?
Boosting your credit score and DTI ratio can help you get a better deal with your refinance. Start by pulling your credit reports from Equifax, Experian and TransUnion for free at AnnualCreditReport.com to assess your situation. Paying off debt can have the dual benefit of improving your credit score and DTI ratio.
How much does it cost to refinance?
As we mentioned earlier, the cost to refinance a mortgage can range anywhere from 2% to 6% of your loan amount. You may be able to roll those costs into your loan, but a larger loan amount means you’ll have higher monthly payments and pay more in interest over the long term.
Want to learn about what you’ll need to refinance your home? Check out our guide to refinancing requirements.
How soon can you refinance a mortgage?
The amount of time you’ll have to wait to refinance after closing on a home varies depending on the loan type, loan program and type of refinance you’re seeking.
| Refinance type | Waiting period |
|---|---|
| Rate-and-term refinance |
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| Cash-out refinance |
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Pros and cons of refinancing your home
| Pros | Cons |
|---|---|
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Searching for lenders? Check out our list of the best refinance lenders.Frequently asked questions
There is no specific law that prevents you from refinancing your home as many times as you’d like. However, you’ll have to meet your lender’s refinance requirements each time you replace your mortgage. These requirements include holding a minimum amount of equity — and since each time you borrow against your equity you essentially “use up” some of that equity, you’re dealing with a finite resource.
As such, if you refinance repeatedly, at a certain point you won’t have enough equity to qualify for a new refinance.
As of November 2024, it takes around 42 days to close on a refinance, according to ICE Mortgage Technology, a digital loan origination platform provider.
If you’re struggling to keep up with your mortgage payments, there are options other than refinancing. If you’re facing financial difficulties due to a job loss or another major life event, you may qualify for a loan modification or forbearance, which can help make your payments more manageable.
You might be able to refinance with no equity, but your options will be more limited. Some programs that allow borrowers to refinance without equity include the FHA streamline refinance and the VA interest rate reduction refinance loan (IRRRL).
Interest rates for a refinance are often slightly higher than for a purchase loan. As of November 2024, refinance rates are, on average, about 80 basis points more expensive than purchase rates.
Yes, you can refinance after bankruptcy, but there’s a required waiting period that varies by loan type. For example, you’ll have to wait four years after discharge for conventional loans and two years after discharge for FHA loans, though the wait can be shorter if you can prove extenuating circumstances.