A refinance could help you achieve a number of different goals, from saving money to cashing out some of your equity. Figuring out if you should refinance comes down to what the refi could do for you. Let’s explore a few signs it might be worth crunching the numbers to see if you should refinance.

What it means to refinance

A refinance doesn’t adjust your current mortgage. Instead, it fully replaces your current home loan with a new one. 

That’s why you can refinance with your current lender or a different one. You’ll take out the new loan, use it to pay off your old one, and move forward with the new refinanced mortgage. 

That refinance comes at a cost. Specifically, you’ll pay closing costs just like you did when you initially got your mortgage. These often range 2–6% of your total loan amount. If you’re refinancing into a $350,000 loan, then, you should roughly budget somewhere between $7,000 and $21,000 for it. 

Why do people choose to do something so expensive? Because a refi can help you achieve a lot of different goals. If you get a lower interest rate, you might save more money over time than you spend in closing. Other types of refinancing can help you pay off your loan faster, get more predictable monthly payments, or turn some of your home equity into cash. 

4 big reasons to refinance 

The closing costs of a refinance might be well worth it if you can: 

#1: Get a lower rate

Interest rates tend to trend upward — and that’s been particularly true in the last five years. It might be hard to beat your current rate in today’s relatively high rate environment.

That said, it’s not impossible, especially if your financial profile has improved. 

Lenders advertise their starting interest rate, but that doesn’t mean you’ll get offered that rate when you apply. The lender looks at your income, history with debt (via your credit score), and other financial factors. This helps them decide how risky you seem. And if you look like a higher-risk borrower, they charge you a higher interest rate. 

All that to say: if your financial profile has improved, you might qualify for a lower rate now. That’s particularly true if you’ve paid off a lot of debt, lowering your debt-to-income (DTI) ratio, or started making a lot more money. 

With a lower interest rate, you stand to save thousands of dollars over the life of your loan. The Consumer Financial Protection Bureau estimates that borrowers who refinanced in 2020 when rates were low saved a collective $5.3 billion. 

#2: Pay off your home faster

A lot of people get a 30-year mortgage. If you’re in a position to make larger payments, though, refinancing into a shorter-term loan — like a 15-year mortgage — gives you a way to save a bunch in interest and own your house outright faster. Lenders view shorter-term loans as lower-risk, so they usually charge a lower interest rate on them. 

#3: Move from an adjustable-rate mortgage to a fixed-rate one

Adjustable-rate mortgages (ARMs) give you a fixed interest rate for an introductory period, then switch to a rate that your lender can change periodically in line with market conditions. If you have a 5/1 ARM, for example, you get the fixed rate for five years, then it adjusts annually. 

The upside of this kind of home loan is that the introductory rate is usually lower than a fixed-rate mortgage. But if rates move upward — something they usually do — you could end up paying more each month than when you started.

If you don’t want this kind of unpredictability, you can refinance your ARM and replace it with a fixed-rate loan. Moving forward, you’ll know exactly how much you’ll pay each month (barring minor changes in your property taxes or insurance costs). That makes it much easier to budget. 

#4: Cash out some of your equity

As home values have climbed over the last decade-plus, you might be sitting on a fairly decent amount of equity. Equity is the value of your house that you own outright because you’ve paid off that portion of your mortgage. If your house is worth $400,000 but you only have $300,000 left on your loan, for example, you have $100,000 in equity.

You can turn some of that equity into cash with a cash-out refinance. Taking out a bigger loan gives you a way to liquidate equity. You can then use that cash to pay off higher-interest debt, fund education or a remodel, or for anything else you want. 

Finding the right time to refinance: Calculating your break-even point

If you’re refinancing to get cash out or to switch from an ARM to a fixed-rate loan, you can skip this math. But if you’re considering a refi to save money, make sure you’ll actually see those savings.

To do that, divide the closing costs by how much money you’ll save each month. If it will cost you $12,000 to close and you’ll save $150 a month, for example, it’ll take you 80 months to recoup your money. If you plan to stay in the home for seven years or longer, it’s probably worth it. 

To find out if a refinance makes financial sense for you, start by seeing what kind of rates and closing costs you can expect. We have live refinance rate tables to help. Any of the lenders will be able to get you a loan estimate, which will spell out closing costs in detail. 

Start doing the math to see if a refinance is right for you. 

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