Is Now the Right Time to Refinance Your Mortgage?
- Admin
- Jun 21
- 6 min read
Updated: 3 days ago
Refinancing means replacing your current mortgage with a new loan. Often homeowners do this to get a lower mortgage interest rate or change the loan term (for example, moving from a 30-year to a 15-year mortgage). A rate-and-term refinance specifically focuses on lowering the rate or adjusting the term without taking cash out of your home. For example, if rates have fallen since you bought your home, you could refinance your loan at the lower rate and a new term. In this case your old loan is paid off by the new loan, and you may save on monthly payments or total interest. On the other hand, a cash-out refinance (not covered here) would let you borrow extra cash against your home equity. Regardless of type, refinancing always involves closing costs (typically about 3%–6% of your loan balance), so it’s important to weigh the benefits before deciding.
Refinancing replaces your old mortgage with a new one (often at a lower rate or different term). This can reduce your monthly payment or help you pay off the loan faster.
Why Do People Refinance Mortgage?
Homeowners choose to refinance for a few common reasons :
• Get a lower interest rate: If current mortgage rates are significantly below your old rate, refinancing can cut your rate and monthly payment. Freddie Mac notes that “even the slightest difference in your mortgage rate can impact your monthly payment”. For example, on a $300,000 loan a half-percent rate drop can save tens of dollars per month, or thousands over the life of the loan.
• Shorten the loan term (build equity faster): You might refinance from a 30-year loan to a 15- or 20-year loan. This means higher monthly payments but much less total interest and a faster payoff. If your finances allow it, a shorter term can save huge amounts of interest in the long run.
• Switch loan types: You might move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for more predictable payments, especially if you plan to stay in the home long-term. Conversely, someone moving soon might switch from a fixed rate to a low short-term ARM to save now, knowing they’ll sell or refinance again before the rate adjusts.
• Lower monthly payments: By refinancing to a lower rate or a longer term, your monthly payment can drop, freeing up cash flow. Freddie Mac’s examples show that lowering even a small fraction of a percent can shrink your payment substantially. You could then use those savings for other expenses or extra principal payments.
• Remove mortgage insurance (PMI) or fees: If your equity has grown above 20%, refinancing into a conventional loan can eliminate private mortgage insurance and lower overall costs. This depends on having enough equity and good credit.
A thorough refinance calculator or worksheet can help you compare options. Many sites (e.g. Bankrate or CFPB) offer a “mortgage refinance calculator” to project your new payment and savings. Shopping around for the best refinance rates is also crucial – comparing quotes from multiple lenders ensures you’re getting a competitive deal.
Is Now the Right Time to Refinance?
The decision hinges on current interest rates versus your current rate, your goals, and how long you plan to stay in the home. In general, experts say refinance when market rates are well below your loan’s rate. A common rule-of-thumb is to consider refinancing if you can lower your rate by at least 0.5%–1% (depending on your loan size, this might not justify the closing costs). For most borrowers, “the ideal time to refinance is when market rates have fallen below the rate on their current loan”. For example, Freddie Mac reports mid-June 2025 mortgage rates around 6.8% – if your current mortgage rate is, say, 7.5%, refinancing could make sense.
However, even a small rate drop could help if the costs and time align. To decide, calculate the break-even point: how many months it takes to recover your refinance costs with your monthly savings. Freddie Mac suggests: divide the total closing costs by the monthly payment reduction. For example, if refinancing costs $5,000 and you save $200 per month, you break even in 25 months (5,000 ÷ 200 = 25). It only makes sense if you expect to stay in the home longer than that break-even time.
Think through these factors:
• Time in home: If you plan to sell or move soon, refinancing may not pay off. CFPB warns that if you move in a few years, you might not have time to recoup the cost of refinancing.
• Closing costs and fees: Expect to pay roughly 3%–6% of your loan amount in upfront fees (lender fees, appraisal, title, etc.). Make sure your savings over time outweigh these costs.
• Loan term extension: If you have 20 years left on a 30-year mortgage and refinance into a new 30-year loan, you extend your term and may pay more interest overall. Refinancing into a longer term for a lower payment only makes sense if you’re okay with slower equity buildup.
• Credit score and debt: A better credit profile than when you first got your loan could help you secure a lower rate now. Conversely, a lower score may mean you won’t save much or pay a higher rate. Lenders will check your DTI (debt-to-income) and overall credit when you apply.
• Prepayment penalty: Some older mortgages have a fee for early payoff. Check your original loan documents. If your loan has a penalty, adding that cost may cancel out any refinance savings.
• Payoff goals: Remember your goal: lower payments, shorter loan, or both? For example, you might deliberately keep your payment similar but shorten the term to pay off faster (common strategy if rates are only slightly lower).
Tools like the CFPB’s “Should I refinance?” guide and online mortgage refinance calculators can walk you through these questions. For instance, Bankrate notes that the break-even analysis is essential: you “won’t begin to realize savings until you reach the breakeven point: when the amount that you save exceeds the closing costs”.
Talking to Lenders and Using Calculators
Before deciding, shop around for the best refinance rates. Even a small rate difference between lenders can save hundreds. Freddie Mac suggests getting multiple loan estimates and negotiating; borrowers who compared quotes “saved on average several thousand dollars over the life of the loan”. Online tools like Zillow’s or Bankrate’s refinance rate tables can help you gauge the market.
A mortgage refinance calculator is a handy way to model scenarios. Enter your loan balance, current rate, new rate and term, plus estimated closing costs. The calculator will show your new payment, total interest, and months to break even. NerdWallet and most banks offer such calculators (look for “should I refinance my mortgage?” or “refinance calculator”).
After running the numbers, reach out to trusted lenders. Ask them about their best refinance rates and get a Loan Estimate (LE) in writing. The LE will outline your new loan’s interest rate, fees, and payment. Compare these side-by-side.
Summary
In short, refinancing can make sense if current rates are significantly lower than your existing rate and you plan to stay in your home long enough to recoup costs. The main benefits are clear – lower interest costs, smaller payments, or owning your home sooner. But it’s not automatic. Work through a break-even analysis, consider your time horizon, and use trusted sources and calculators to guide you.
If after crunching the numbers you can save money overall and meet your goals, then now could indeed be the right time to refinance. Always take advantage of available resources – Freddie Mac, the CFPB, and financial websites offer free tools and tips – so you make the best financial decision for your situation.
Sources
Authoritative guides and data from Freddie Mac, CFPB, Bankrate, Investopedia, and other expert resources were used to explain refinancing and when it makes sense. These sources provide clear definitions of refinancing, common goals, and practical benchmarks (like break-even analysis) to help U.S. homeowners decide whether refinancing is right for them.
Should I refinance?
Rate-and-Term Refinance: Definition, Examples, Vs. Cash-Out
Planning to refinance
When Should You Refinance Your Mortgage? | Bankrate
Should You Wait For Rates To Drop 1% To Refinance? - Bankrate
Average 30-year mortgage rate eases to 6.81%
HOME REFINANCE | FAIR Mortgage
Mortgage answers | Consumer Financial Protection Bureau
