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REAL-ESTATE When and How to Refinance Your Mortgage (The Complet... 2026-02-27 · 5 min read · refinancing mortgage · mortgage refinance · lower mortgage payment

When and How to Refinance Your Mortgage (The Complete Guide)

real-estate 2026-02-27 · 5 min read refinancing mortgage mortgage refinance lower mortgage payment cash-out refinance mortgage rates

Refinancing your mortgage means replacing your current mortgage with a new one — usually to get a better interest rate, lower monthly payment, change the loan term, or access equity. When it makes sense, refinancing can save tens of thousands of dollars over the life of the loan.

Why People Refinance

Rate-and-term refinance: Getting a lower interest rate and/or changing the loan term (e.g., from a 30-year to a 15-year mortgage). The most common type.

Cash-out refinance: Borrowing more than you owe and taking the difference in cash. Use for home improvements, debt consolidation, or major expenses.

Cash-in refinance: Bringing cash to closing to reduce the loan balance. Used to eliminate PMI, lower the loan amount, or get a better rate by crossing loan-to-value thresholds.

ARM to fixed: Converting an adjustable-rate mortgage to a fixed rate for payment stability.

The Break-Even Calculation: Most Important Math

Refinancing costs money upfront — typically 2-5% of the loan amount in closing costs. A refinance only makes sense if you'll stay in the home long enough to recoup those costs through monthly savings.

Break-even formula:

Break-even months = Closing costs ÷ Monthly savings

Example:

If you plan to stay in the home for more than 24 months, refinancing makes sense. If you're planning to sell or move within 2 years, it doesn't.

The "1% Rule" — Useful but Incomplete

You've probably heard that refinancing makes sense when rates drop at least 1%. This is a rough heuristic that can work as a starting point but misses nuance:

Always run the actual math, not just the rule of thumb.

When Refinancing Makes Sense

Interest rates have dropped significantly: If you have a 7% mortgage and rates fall to 5.5%, the math often works — even with closing costs.

Your credit score has improved substantially: If your credit was 640 when you bought and it's now 760, you may qualify for significantly better rates.

You have a high-rate loan: FHA loans often make sense to refinance to conventional once you have 20% equity (eliminating FHA mortgage insurance is itself a big savings).

You want to pay off the mortgage faster: Refinancing from a 30-year to a 15-year typically costs more per month but dramatically less in total interest. The rate on 15-year mortgages is usually 0.5-0.75% lower than 30-year.

You want to lower your monthly payment: Even if you extend the term, lowering the interest rate can reduce payment and improve cash flow. Understand that extending a 25-year mortgage to 30 years means more total interest even at a lower rate.

When Refinancing Doesn't Make Sense

You're planning to move soon: If you'll be in the home for less time than the break-even period, refinancing costs you money.

You're far into your mortgage: Mortgages are front-loaded with interest (amortization). If you're in year 22 of a 30-year mortgage, you're now mostly paying principal. Refinancing to a new 30-year loan restarts the interest clock and you'd pay far more total interest.

Closing costs are disproportionate: Some lenders charge higher fees. Shop multiple lenders.

Your current mortgage has a prepayment penalty: Check whether your existing mortgage penalizes early payoff (less common now but exists in some loans).

How to Refinance

Step 1: Check your credit score A credit score of 740+ typically gets you the best rates. If it's lower, consider whether improving it first (by 20-40 points) would make refinancing more valuable.

Step 2: Know your home's current value Lenders will require an appraisal (or sometimes use automated valuation). Your LTV (loan-to-value ratio) affects the rate you qualify for:

Step 3: Gather documentation Lenders typically require:

Step 4: Shop at least 3 lenders Mortgage rates vary significantly between lenders. Get Loan Estimates from multiple sources and compare:

Online lenders (Better.com, loanDepot), credit unions, and banks all offer refinancing. Local credit unions often have competitive rates for members.

Step 5: Lock your rate Once you've chosen a lender, lock the interest rate to protect against rate increases during the 30-60 day closing process.

Step 6: Close Review all documents carefully before signing. The refinance is complete when new loan funds pay off the old one.

Closing Costs: What You're Paying

Typical closing costs include:

Total: typically 2-3% of loan amount for a rate-and-term refinance.

No-closing-cost refinance: Some lenders offer to roll closing costs into the loan or accept a slightly higher interest rate in exchange for paying your closing costs. This can make sense if you're unsure how long you'll stay, though the higher rate costs you over time.

The Refinancing Math for a 15-Year Loan

Many homeowners who have 20+ years left on a 30-year mortgage benefit from refinancing to a 15-year loan:

Monthly payment increases from ~$1,996 to ~$2,572 (+$576/month), but total interest savings: $262,000 over the life of the loan.

Not everyone can absorb the higher payment, but for those who can, it's one of the highest-return financial decisions available.

A Word on "No Brainer" Offers

Refinancing companies advertise aggressively. Before responding to unsolicited refinancing offers:

Refinancing makes sense when the numbers work. Always calculate the break-even for your specific situation before committing.