Key Takeaways
- Refinancing makes the most sense when you can lower your interest rate by at least 0.5% to 1%, according to general guidance from Freddie Mac.
- Your credit score, home equity, and closing costs all play a big role in whether refinancing will actually save you money.
- The “break-even point” – the month when your savings outpace your upfront costs – is one of the most important numbers to calculate before you refinance.
- Refinancing can lower your monthly payment, shorten your loan term, or help you tap into your home equity, but it is not the right move for everyone.
- Use the Wirly refinance calculator to quickly estimate your potential savings before speaking with a lender.
What Does It Mean to Refinance a Mortgage?
When you refinance your mortgage, you replace your current home loan with a new one. The new loan pays off the old one, and you start making payments on the new terms. People refinance for several reasons: to get a lower interest rate, to reduce their monthly payment, to change how long they have to repay the loan (called the loan term), or to access the equity they have built up in their home.
Equity is the portion of your home that you truly own. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Some homeowners refinance to convert that equity into cash for things like home improvements or paying off high-interest debt.
Refinancing sounds simple, but the timing matters a lot. Refinancing at the wrong time – or for the wrong reasons – can actually cost you more money in the long run.
Signs That It May Be a Good Time to Refinance
Interest Rates Have Dropped
One of the most common reasons people refinance is to take advantage of lower interest rates. If rates have fallen since you took out your original mortgage, you may be able to save a significant amount over the life of your loan.
Freddie Mac research has historically suggested that a rate reduction of at least 0.5% to 1% can make refinancing worthwhile, though that depends on how much you owe and how long you plan to stay in your home. Even a small drop in your APR (Annual Percentage Rate – the true yearly cost of your loan including fees) can add up to thousands of dollars in savings.
Your Credit Score Has Improved
Lenders use your credit score to decide what interest rate to offer you. If your score was lower when you first got your mortgage and it has gone up since then, you may now qualify for a much better rate. For example, moving from a credit score of 640 to 740 could unlock meaningfully lower offers from lenders.
You can check your credit score for free through many banks and credit card providers. If your score has improved by 40 to 60 points or more, it is worth looking into whether you could qualify for better mortgage terms today.
You Want to Change Your Loan Term
Some homeowners refinance to shorten their loan term. For instance, switching from a 30-year mortgage to a 15-year mortgage means you will pay off your home faster and pay far less interest overall – though your monthly payment will likely go up.
Others refinance to lengthen their loan term, which lowers the monthly payment and frees up cash each month. This can make sense if your financial situation has changed and you need some breathing room in your budget. The trade-off is that you will pay more interest over time.
You Have an Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) starts with a fixed rate for a set number of years, then changes based on market conditions. If your ARM is about to adjust and rates are expected to rise, refinancing into a fixed-rate mortgage can protect you from higher payments in the future. A fixed rate stays the same for the life of the loan, which makes budgeting more predictable.
You Need Access to Your Home Equity
A cash-out refinance lets you borrow more than you currently owe and receive the difference as cash. This is one way homeowners fund large expenses. Keep in mind that this increases the total amount of your mortgage, so you will be repaying more over time. It is important to weigh that cost carefully before going this route.
When Refinancing Might Not Make Sense
You Plan to Move Soon
Refinancing comes with closing costs – fees you pay to finalize the new loan. These typically range from 2% to 5% of the loan amount, according to the Consumer Financial Protection Bureau (CFPB). If you plan to sell your home within the next two to three years, you may not stay long enough to recover those costs through your lower monthly payments.
This is why calculating your break-even point is so important. The break-even point is how many months it takes for your monthly savings to equal your upfront closing costs. Use the Wirly break-even calculator to find yours before you commit.
Your Loan Balance Is Low
If you are already many years into your mortgage and your remaining balance is small, the math may not work in your favor. Closing costs on a refinance are paid upfront, and the monthly savings on a small loan balance may take decades to offset those costs.
Your Credit Score or Income Has Declined
If your financial situation has weakened since you first got your mortgage, lenders may offer you a higher interest rate than you currently have. In that case, refinancing could actually increase your costs rather than reduce them. It is worth getting a few quotes from different lenders before deciding, but go in with realistic expectations.
You Would Restart a Long Loan Term
If you are 10 years into a 30-year mortgage and you refinance into a new 30-year loan, you are adding 10 years back onto your payoff timeline. Even if your monthly payment drops, you could end up paying more interest overall because you are stretching the loan out again.
How to Decide: A Step-by-Step Approach
- Check your current mortgage terms. Find out your existing interest rate, remaining loan term, and monthly payment. This is your baseline for comparison.
- Review your credit score. A higher score helps you qualify for better rates. If your score needs work, it may be worth waiting and improving it first.
- Estimate your home’s value. Lenders typically want you to have at least 20% equity before refinancing without added costs like private mortgage insurance (PMI). PMI is an extra monthly fee that protects the lender if you default.
- Get multiple quotes. Rates and fees vary between lenders. According to Freddie Mac research, getting at least three to five quotes can save borrowers thousands of dollars. Compare the APR, not just the advertised rate, to get a true picture of the cost.
- Calculate your break-even point. Divide your estimated closing costs by your monthly savings. If the number of months is less than how long you plan to stay in the home, refinancing may make sense. Try the Wirly break-even calculator to run the numbers.
- Run a full refinance comparison. Use the Wirly refinance calculator to model different scenarios side by side.
- Compare lender options. Once you know what you are looking for, explore the best refinance lenders reviewed on Wirly to find vetted options.
Pros and Cons of Refinancing at a Glance
Potential Benefits
- Lower interest rate means less paid over the life of the loan
- Reduced monthly payment can improve cash flow
- Shorter loan term can help you become debt-free sooner
- Switching from an ARM to a fixed rate adds payment stability
- Cash-out option lets you use your home equity for major expenses
Potential Drawbacks
- Closing costs can be thousands of dollars upfront
- A longer new loan term means more total interest paid
- Requires a credit check and full loan application process
- May not be worth it if you plan to move in the near future
- Cash-out refinancing increases your total debt load
Frequently Asked Questions
How much can I save by refinancing my mortgage?
Savings depend on your loan balance, the difference in interest rates, and how long you keep the new loan. On a $250,000 mortgage, dropping your rate by 1% could save over $150 per month. Use the Wirly refinance calculator to get a personalized estimate based on your actual numbers.
What credit score do I need to refinance?
Most conventional lenders look for a credit score of at least 620, though some loan programs may allow lower scores. The best interest rates are generally reserved for borrowers with scores of 740 or higher. If your score is below 620, it may be worth spending a few months paying down debt and fixing any errors on your credit report before applying.
How much do closing costs usually cost when refinancing?
Closing costs typically range from 2% to 5% of the loan amount, according to the CFPB. On a $200,000 loan, that means $4,000 to $10,000 upfront. Some lenders offer “no-closing-cost” refinances, but those costs are usually folded into your rate or loan balance instead of eliminated entirely.
How long does the refinancing process take?
The refinancing process typically takes between 30 and 60 days from application to closing, according to data from the Mortgage Bankers Association. This includes time for the lender to verify your income and assets, order an appraisal of your home, and process all the paperwork.
Can I refinance if I have not built up much equity?
It can be harder to refinance with less than 20% equity. You may face additional costs like PMI, or you may have fewer lender options available to you. Some government-backed programs – such as the FHA Streamline Refinance or the VA Interest Rate Reduction Refinance Loan (IRRRL) – are designed to help eligible homeowners refinance with limited equity. Check with a licensed lender to see what programs you may qualify for.