Refinancing your mortgage means replacing your current loan with a new one — ideally at a better rate, shorter term, or both. Done right, it can save you hundreds per month and tens of thousands over the life of your loan. Done wrong (or at the wrong time), it can cost you money. Here's how to know when it makes sense.
The Break-Even Rule
Refinancing costs money upfront — typically $3,000–$6,000 in closing costs. The break-even point is how long it takes for your monthly savings to cover those costs.
Break-Even Formula: Closing Costs ÷ Monthly Savings = Break-Even Months
5 Signs It's Time to Refinance
Rates Have Dropped at Least 0.75–1%
The old "1% rule" says refinancing makes sense when you can lower your rate by 1 percentage point. In reality, even 0.75% can make sense on a large loan balance. The bigger your loan, the smaller the rate drop needed to justify the cost.
Your Credit Score Has Improved Significantly
If your score was 640 when you bought but is now 760, you may qualify for a dramatically lower rate even without any market change. Run a refinance check any time your score improves by 40+ points.
You Want to Eliminate PMI
If your home has appreciated and you now have 20%+ equity, refinancing lets you get a new loan without PMI — saving hundreds per month.
You Want to Shorten Your Loan Term
Refinancing from a 30-year to a 15-year mortgage can save enormous amounts in interest — though your monthly payment will be higher. This makes sense if your income has grown and you want to be debt-free faster.
You Have an ARM and Rates Are Rising
If your adjustable-rate mortgage is about to reset in a rising rate environment, refinancing to a fixed rate can lock in stability before your payment spikes.
When NOT to Refinance
- You're planning to sell the home before your break-even point
- You're close to paying off your mortgage — refinancing restarts the amortization clock, meaning early payments go mostly to interest again
- You have significant prepayment penalties on your current loan
- Your credit score has worsened — you might get a worse rate than your current one
- You're switching to a longer term just to lower payments — you'll pay far more interest over time
The Refinance Process
Refinancing is similar to getting your original mortgage. You'll need to:
- Shop at least 3 lenders and compare Loan Estimates
- Submit income, tax, and asset documentation
- Get an appraisal (typically $300–$600)
- Go through underwriting (2–4 weeks)
- Attend a closing and sign documents
The entire process typically takes 30–45 days. You can lock your rate early to protect against market movement during processing.