When Should I Refinance My Mortgage? | Wirly

Key Takeaways

• Refinancing makes the most sense when you can lower your interest rate by at least 0.5% to 1%, according to Freddie Mac research.
• Your credit score, home equity, and closing costs all play a big role in whether refinancing will save you money.
• The “break-even point” tells you how long it takes for your savings to cover the cost of refinancing – this is one of the most important numbers to calculate before you decide.
• Refinancing is not always about lowering your monthly payment. It can also help you change your loan term or tap into your home’s equity.
• Comparing multiple lenders and their APR (annual percentage rate) is one of the best ways to find a good deal.

What Does It Mean to Refinance Your Mortgage?

When you refinance, you replace your current mortgage with a new one. The new loan pays off what you owe on the old one. Then you start making payments on the new mortgage under different terms – usually a new interest rate, a new loan term, or both.

People refinance for many reasons. Some want a lower monthly payment. Others want to pay off their home faster. Some want to take cash out of the equity they have built up in their home. Equity is the portion of your home’s value that you actually own, meaning the difference between what your home is worth and what you still owe on it.

Refinancing is not free, though. You will pay closing costs, which are fees charged by the lender and other parties to process the new loan. These typically run between 2% and 6% of your loan amount, according to the Consumer Financial Protection Bureau. That means timing your refinance correctly is very important.

Signs That It May Be a Good Time to Refinance

Your Interest Rate Could Drop Significantly

One of the most common reasons to refinance is to get a lower interest rate. A lower rate means you pay less interest over the life of the loan, and it usually lowers your monthly payment too.

Freddie Mac has noted that homeowners who refinance to cut their rate by at least 0.75% to 1% tend to see meaningful savings. If rates have dropped since you took out your original mortgage, it may be worth checking what rate you could qualify for today. Use the Wirly refinance calculator to see how much a rate change could affect your monthly payment.

Your Credit Score Has Improved

Your credit score has a big influence on what interest rate a lender will offer you. If your score was lower when you first got your mortgage, you may have been given a higher rate. If your score has gone up since then, you may now qualify for a better deal.

According to myFICO, borrowers with scores above 760 typically receive the best mortgage rates. Even moving from a “fair” score to a “good” score can make a real difference in what lenders offer you.

You Want to Change Your Loan Term

Your loan term is the number of years you have to pay back the mortgage. Common terms are 15 years and 30 years. Refinancing lets you switch between them.

• Shorter term (e.g., 30 years to 15 years): You will likely pay a lower interest rate and pay off your home faster, but your monthly payment will go up.
• Longer term (e.g., 15 years to 30 years): Your monthly payment goes down, but you will pay more interest overall and take longer to own your home outright.

Think carefully about what fits your current financial situation and long-term goals before changing your loan term.

You Have Built Up Solid Home Equity

If your home has gone up in value, or you have paid down a good portion of your loan, you may have significant equity. A cash-out refinance lets you borrow against that equity by taking out a new loan that is larger than what you owe. You receive the difference as cash.

This can be useful for paying off high-interest debt, funding home improvements, or covering a major expense. However, it increases the amount you owe on your home, so it comes with its own risks.

Most lenders want you to keep at least 20% equity in your home after a cash-out refinance. Dipping below that can mean paying for private mortgage insurance (PMI), which is an added monthly fee that protects the lender – not you – if you default on the loan.

You Want to Switch from an Adjustable Rate to a Fixed Rate

If you have an adjustable-rate mortgage (ARM), your interest rate can change over time based on market conditions. This means your monthly payment can go up or down. If you are concerned about rates rising, refinancing into a fixed-rate mortgage locks in a steady payment for the life of the loan.

When Refinancing May Not Make Sense

Refinancing is not always the right move. Here are some situations where it might not be worth it:

• You plan to move soon. If you sell your home before reaching your break-even point, you will not recoup your closing costs. More on this below.
• Your credit score has dropped. A lower score may mean you get offered a higher interest rate than you currently have, making refinancing a bad deal.
• You are far into your loan. Mortgage loans are structured so that you pay more interest early on. If you are near the end of your loan term, you are already paying mostly principal. Starting a new loan resets that clock and can cost you more in total interest.
• The closing costs outweigh the savings. If your monthly savings are small and closing costs are high, it may take many years to break even.

How to Calculate Your Break-Even Point

The break-even point is the moment when your total savings from refinancing equal the amount you paid in closing costs. After that point, you are truly saving money each month.

Here is a simple way to figure it out:

1. Find out your total closing costs (ask the lender for a Loan Estimate).
2. Calculate how much your monthly payment will go down after refinancing.
3. Divide your closing costs by your monthly savings.
4. The result is how many months it will take to break even.

Example: If closing costs are $5,000 and you save $150 per month, your break-even point is about 33 months, or just under 3 years. If you plan to stay in your home longer than that, refinancing could make financial sense.

You can run these numbers quickly using the Wirly break-even calculator.

How to Get Started With Refinancing

If you have decided that refinancing may be right for you, here are the steps to take:

1. Check your credit score. Pull a free copy of your credit report at AnnualCreditReport.com and review it for any errors before applying.
2. Know your home’s value. Get a rough estimate using online tools. A lender will require an official appraisal, but knowing the ballpark helps you understand how much equity you have.
3. Set your goal. Are you trying to lower your monthly payment, shorten your loan term, or get cash out? Your goal will shape what kind of refinance to look for.
4. Shop multiple lenders. Do not accept the first offer you see. Comparing at least three lenders can save you thousands of dollars over time. Look at the APR (annual percentage rate), which includes the interest rate plus fees, so you are comparing apples to apples.
5. Review the Loan Estimate. When you apply, each lender must provide a Loan Estimate within three business days. This document shows your rate, monthly payment, closing costs, and other key terms.
6. Lock your rate. Once you find a good offer, ask about locking your interest rate. A rate lock protects you if rates rise before your loan closes.
7. Close the loan. Review all documents carefully before signing. After closing, you will typically have a three-day window to cancel if you change your mind (this is called the right of rescission).

Comparing lenders side by side is one of the smartest things you can do. Visit Wirly’s best refinance lenders page to see options in one place.

Pros and Cons of Refinancing

Potential Benefits

• Lower interest rate and reduced total interest paid over time
• Lower monthly payment, freeing up cash in your budget
• Ability to pay off your home faster by shortening the loan term
• Access to home equity through a cash-out refinance
• Switch from an unpredictable adjustable rate to a stable fixed rate

Potential Drawbacks

• Closing costs can be significant (typically 2% to 6% of the loan amount)
• Extending your loan term means paying more interest in the long run
• A cash-out refinance increases your debt and puts your home at risk if you cannot repay
• The process takes time and requires documentation, similar to your original mortgage
• If your credit score or finances have worsened, you may not qualify for a better rate

Frequently Asked Questions

How often can I refinance my mortgage?

There is no legal limit on how many times you can refinance. However, some lenders require a “seasoning period,” meaning you must wait a certain number of months after your last refinance before doing it again. Six to twelve months is common. Each refinance also comes with closing costs, so doing it too frequently can eat into any savings you might gain.

How much does it cost to refinance?

Closing costs for a refinance typically range from 2% to 6% of the loan amount, according to the Consumer Financial Protection Bureau. On a $250,000 loan, that could be $5,000 to $15,000. Some lenders offer “no-closing-cost” refinances, but those costs are usually rolled into the loan or reflected in a higher interest rate.

Does refinancing hurt my credit score?

Applying for a refinance triggers a hard inquiry on your credit report, which may cause a small, temporary dip in your credit score. If you shop multiple lenders within a short window – typically 14 to 45 days depending on the credit scoring model – those inquiries are usually counted as one. The impact tends to be minor and short-lived.

What credit score do I need to refinance?

Most conventional loan refinances require a credit score of at least 620. FHA loans (backed by the Federal Housing Administration) may allow scores as low as 580 in some cases. The higher your score, the better the interest rate you are likely to receive. Lenders look at several other factors too, including your income, debt levels, and home equity.

What is the difference between interest rate and APR when refinancing?

The interest rate is the basic cost of borrowing money. The APR (annual percentage rate) includes the interest rate plus most fees associated with the loan, expressed as a yearly percentage. Because it captures more of the true cost, the APR is a better tool for comparing offers from different lenders. Always ask each lender for both numbers when shopping around.