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6 times when it makes sense to refinance your mortgage
If you hope to refinance your home soon, you may be in luck. With the Federal Reserve's recent decision to begin cutting rates — a trend that's expected to continue through 2025 — the market may be in your favor, especially if you bought your home in the last few years.
But deciding when to refinance a mortgage goes well beyond just looking at interest rates. Here are six reasons it could be a good time to refinance your mortgage.
In this article:
Read more: Rate-and-term refinance — what it is and how it works
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 can include:
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When interest rates have fallen below your current mortgage rate enough to warrant paying the closing costs of refinancing. That also gives you the option of a lower monthly payment.
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When your credit score has significantly improved since you closed on your home loan. Now, a new loan might earn you a better mortgage interest rate.
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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 and 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.
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When you want to eliminate mortgage insurance.
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When you want to swap an adjustable-rate mortgage with a fixed-rate loan. Or the other way around.
We’ll dive deeper into each of these scenarios below.
Learn more: Is it time to refinance your mortgage? 5 ways to prepare
When to refinance: Interest rates have fallen
The most obvious reason of all to refinance a mortgage: When you can lower your interest rate.
Lower rates may be easier to find in the coming year due to the Federal Reserve's September 2024 decision to begin cutting its fed funds rate. Mortgage rates have already begun decreasing in anticipation of this, and with more cuts forecasted through the end of 2025, mortgage rates could soon be more affordable.
But 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.
Dig deeper: What are today’s mortgage refinance rates?
When to refinance: Your credit score has improved
If you've been making timely payments on your mortgage, your credit score may have improved significantly since you bought your house. Check your score to see where it stands.
Then, compare your credit score range 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 620 to 639 when you bought your house, and it's now in the 660 to 679 range. In this case, you might lower your interest rate by nearly a full point just because your credit score improved. (Calculated by adding the two rows of improvement: 0.55 + 0.43 = 0.98.)
With a 30-year mortgage for $300,000, your improved credit score might save you over $72,000 in interest over the life of the loan.
Use the FICO loan savings calculator to run the numbers on your credit score.
Read more: How to improve your 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.
When to refinance: Changing the loan term
Another reason to refinance your mortgage is to get a shorter term. Refinance your loan from 30 to 15 years, and at recent interest rates, you might save around 0.88% on your fixed-rate mortgage. (As of mid-September 2024, the average 30-year rate was 6.20%, and the 15-year loan rate was 5.27%, according to Freddie Mac.)
This is a long-term wealth-building strategy. As an example, on that $300,000 loan we mentioned above, your monthly mortgage payment goes up by about $578, but you pay off your home in half the time. And save over $227,000 in interest.
Dig deeper: 15-year vs. 30-year mortgage — How to decide which is better
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. Perhaps you want to lower your monthly payment to get some breathing room in your budget. Then, you might use the monthly savings to pay off some high-interest debt.
When to refinance: Tapping the equity in your home
When property values increase, or you've been in your home long enough to gain some equity, it can be a good time to refinance.
A cash-out refinance replaces your original mortgage loan with a new one, allowing you to pocket some of your home's value.
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 don't lose the lower interest rate of your existing loan.
Dig deeper: Home equity line of credit (HELOC) vs. home equity loan
When to refinance: Eliminating mortgage insurance
If you put down less than 20% when you bought your house and got a conventional loan, you have been paying private mortgage insurance (PMI). Once you have 20% equity in your home, you should submit, in writing, a request for your lender or mortgage servicer to cancel mortgage insurance. Simple enough, right?
It should be no problem — unless the lender has been paying your mortgage insurance premiums. Some lenders may offer to pay the mortgage insurance in exchange for a slightly higher interest rate. In that case, you will need to consider a mortgage refinance to eliminate that lender-paid mortgage insurance.
You might also want to eliminate FHA mortgage insurance premiums by refinancing into a conventional mortgage.
Learn more: How to get rid of private mortgage insurance
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 refinance from an ARM to a fixed-rate loan
Perhaps you snagged an adjustable-rate mortgage when interest rates were moving higher. Now, as the interest rate cycle begins to reverse, you may soon see a mortgage rate that you want to lock in. That's when you might consider refinancing from an ARM to a fixed-rate mortgage.
Or is this a good time to consider an adjustable-rate mortgage?
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 drop too.
If you plan to stay in your house only a few more years, an ARM may be a perfect solution. Consider refinancing your loan to an ARM with a low introductory rate period roughly matching the time you'll stay in the house. When you move to a new place, you can see how interest rates look and perhaps consider going back 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, be sure to shop 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 for 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.
Read 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.
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).
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, your 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 also 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 a greater amount of 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. (Except for "seasoning" times mentioned next.)
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 can be 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.
This article was edited by Laura Grace Tarpley.
