When does it make sense to refinance my mortgage?

When to refinance your mortgage comes down to one test: will you keep the new loan long enough for the savings to pay back the costs? If yes, and the new loan fits your goals, refinancing can make sense. If you might move or refinance again before that point, it usually doesn’t.

Refinancing means replacing your current mortgage with a brand-new loan, with a new rate, term and monthly payment. It is not free. You pay closing costs again, much like when you bought. This guide shows how to weigh those costs, run the break-even math, and spot the traps that make a lower payment cost more in the end.

What are good reasons to refinance?

The most common reasons are to get a lower interest rate, switch from an adjustable rate to a fixed rate, shorten your loan term to pay less interest, or take cash out of your home equity. Each goal changes which numbers matter, so decide what you want before you shop.

Freddie Mac lists four main reasons homeowners refinance:

• Lower your rate. If market rates are lower than when you closed, a new loan could reduce your monthly payment and total interest.
• Change loan type. You might move from an adjustable-rate mortgage (ARM) to a fixed rate for stability. Or you might pick an ARM if you plan to sell before its fixed period ends.
• Build equity faster. If your income has grown, moving from a 30-year to a 15-year loan can save a lot of interest.
• Get cash out. You borrow more than you owe and take the difference in cash. Our guide to cash-out refinance vs. a HELOC compares that choice with a home equity line of credit.

Some borrowers also refinance to remove mortgage insurance, or to take a co-borrower off the loan after a divorce. Those can be valid reasons, but run the same cost test.

How much does it cost to refinance?

Freddie Mac says you can expect refinancing to cost about 3% to 6% of your loan principal. The total depends on your lender, your credit score and where you live. On a $300,000 loan, that range is roughly $9,000 to $18,000, though your actual quote may differ.

According to Freddie Mac’s refinance cost guide, the charges are similar to the closing costs you paid when you bought. They can include:

• Lender origination and underwriting fees
• Appraisal and credit report fees
• Title services and government recording fees
• Survey, attorney and tax service fees
• Any discount points you choose to buy

Your Loan Estimate lists each one. Freddie Mac also says that a “no-cost refinance” is not truly free. The lender is probably charging a higher rate or adding the costs to your loan balance, which can cost more over the life of the loan. For more on paying to lower your rate, see should you buy mortgage points.

How do you calculate your break-even point?

Divide your total refinance costs by your monthly savings. The answer is the number of months it takes to earn back what you paid. If you expect to keep the new loan well past that month, the refinance can pay off. If you might move first, it probably won’t.

Here are the steps:

1. Add up all refinance costs from the Loan Estimate.
2. Subtract the new monthly principal and interest payment from your current one.
3. Divide the costs by the monthly savings.
4. Compare that number of months with how long you expect to stay in the home and keep the loan.

Freddie Mac gives a plain example. If there is a chance you may move in two years, but it will take three years to recoup the cost, the refinance probably does not make financial sense. Freddie Mac also notes this quick test does not work for cash-out refinances or for refinances that shorten your term, because those change more than the payment.

Does a new 30-year loan cost more in the long run?

It can. Restarting a 30-year clock adds years of payments, so a lower monthly payment may still mean more total interest. Freddie Mac warns that refinancing 20 remaining years into a new 30-year loan extends your term. Compare total cost over the life of the loan, not just the payment.

The table below uses the same example homeowner. It compares keeping the current loan with three refinance options. All rates are hypothetical, and “total remaining cost” adds every future principal and interest payment plus the $9,300 refinance cost.

P&I means principal and interest. Taxes and insurance are left out.

The new 30-year loan has the lowest payment, but it saves only about $10,900 in total, because it adds three extra years of payments. Matching the 27 years left saves far more. The 15-year option costs more each month but saves the most overall. Some lenders offer custom terms, so ask.

You can also prepay a longer loan

If you want the safety of a lower required payment, you can take the 30-year loan and pay extra principal each month. Freddie Mac notes that savings from a lower payment can go toward principal, which pays the loan off sooner. Confirm there is no prepayment penalty first.

When is refinancing a bad idea?

Refinancing is often a poor choice if you plan to move before your break-even month, if your credit or income has slipped since you bought, or if the only benefit comes from stretching your term. It is also risky if you take cash out for spending you can’t afford to repay.

Watch for these warning signs:

• You might sell or move within a few years.
• The savings come mostly from extending the term, not from a lower rate.
• Your credit score has dropped, so the rate you’re offered is not much better.
• Your home’s value has fallen, leaving little equity. Loans with less equity often come with higher pricing.
• You would roll large closing costs into the loan and owe more than before.
• An offer promises you can skip payments or get a rate that sounds too good to be true. VA specifically warns veterans about misleading refinance offers like these.

What are your rights at a refinance closing?

On most refinances, federal law gives you three business days after closing to cancel the loan in writing. This “right of rescission” does not apply when you refinance with the same lender and borrow no new money. You cancel in writing, not by phone.

The CFPB explains the key rules:

• The clock starts only after you sign the note, receive your Closing Disclosure, and receive two copies of a notice of your right to cancel.
• Business days include Saturdays but not Sundays or legal public holidays.
• You must cancel in writing before midnight of the third business day. A phone call does not count.
• If you cancel, the lender must return the money you paid within 20 calendar days.

The CFPB also notes that you have no right to cancel when your same lender refinances your loan and you borrow no extra money. The refinance closing itself is very similar to a purchase closing. Our guide to what happens at closing walks through the day.

Are there special refinance options for VA and other government loans?

Yes. If you have a VA-backed loan, VA’s Interest Rate Reduction Refinance Loan (IRRRL), often called a streamline refinance, can lower your rate or move you from an adjustable to a fixed rate. FHA and USDA borrowers can ask lenders whether a streamlined refinance is available for their loan.

According to VA, you may be eligible for an IRRRL if you already have a VA-backed home loan, you are refinancing that same loan, and you live in or used to live in the home. VA says you can include closing costs in the new loan, or take a slightly higher rate so the lender pays them. VA also tells borrowers to divide closing costs by expected monthly savings before deciding, the same break-even test above.

If you have an FHA loan and now have more equity, some borrowers refinance into a conventional loan to stop paying FHA mortgage insurance. Read when you can remove PMI and FHA vs. conventional loans before you choose.

Should you try to time the market?

No one can reliably predict where rates will go next. Instead of guessing, decide what rate would make the math work for you, then watch weekly averages. When real lender quotes reach that level and pass your break-even test, it is worth acting.

Freddie Mac publishes average rates every week in its Primary Mortgage Market Survey. Use it as a guide to the trend, not as a quote. Your own rate depends on your credit score, equity, loan type and the points you pay.

Taxes are a minor factor for most people. The IRS says points paid to refinance are generally deducted evenly over the loan’s term, and only if you itemize.

What to do next

A refinance should earn back its costs well before you expect to move or refinance again. Gather your numbers, get real quotes and test each option against your plans. If the math is close, keeping your current loan is a perfectly good choice.

1. Find your current balance, rate, payment and years remaining on your latest mortgage statement.
2. Write down how long you realistically expect to stay in the home.
3. Get Loan Estimates from at least three lenders for the same loan type and term.
4. For each offer, divide total costs by monthly savings, and compare total remaining cost, not only the payment.
5. If you want a free or low-cost second opinion, find a HUD-approved housing counselor with the CFPB’s housing counselor search.