When to Refinance Your Mortgage

Learn About When It Makes Sense to Refinance

When you refinance your home, you'll pay off your current mortgage and replace it with a new loan that has a lower interest rate or better terms.

Should you refinance your home loan? Here are some possible scenarios when it makes sense to consider refinancing your current mortgage.

1. When You Want to Save

Many homeowners refinance with the goal of saving money. There are a few different ways that getting a new home loan could allow you to lower your monthly payments.

Pay Less In Interest

When lower interest rates are available, you can refinance to a better rate and save money on interest. You'll want your new rate to be substantially lower than the rate on your current mortgage so that refinancing makes sense after you pay the closing costs that may be required.

How much lower? It depends on how quickly you will break even from closing costs. To calculate your break-even point:

• Determine your closing costs. These are typically 2% to 5% (according to Fannie Mae) of the value of the loan
• Determine how much you will save each month. This equals your old monthly payment minus your new monthly payment
• Determine how many months it will take you to recover the closing costs

Say, for example, you currently owe $400,000, you have 300 months remaining on your home loan, your interest rate is 7.5%, and your monthly payment is $2,956. If you refinance to a new 30-year loan at 6.25% and pay total fees of 3%, your new monthly payment would be $2,463. Your monthly savings would total $493 and your upfront closing costs would be $12,000.

With $493 in monthly savings, it would take you around 24 months to break even. If you planned to stay in your home for at least that long, refinancing would be worthwhile.

You should always do this math before refinancing. If you have a VA or an FHA loan, you should also check to see if you qualify for streamline refinancing. VA streamline refinances (also known as interest rate reduction refinance loans or IRRRLs) let you lower your interest rate with less paperwork and faster closings. You can enjoy similar benefits with an FHA streamline refinance.

However, keep in mind that you can only streamline refinance an existing VA loan to a new VA loan or an existing FHA loan to a new FHA loan. There are eligibility and other requirements you will need to meet as well, in order to get your loan approved.

Remove Mortgage Insurance

Homeowners can also choose to refinance to stop paying mortgage insurance. With a conventional loan, you can usually remove private mortgage insurance (or PMI) without refinancing. Many homeowners can stop paying PMI when their home's equity reaches 20%, and lenders are required to remove PMI when a home's equity reaches 22%.

With an FHA loan, the rules for mortgage insurance are different. If you've received an FHA loan in the recent past, you will have to pay mortgage insurance premiums (or MIP) for at least 11 years. Plus, depending on the amount of your down payment, you may have to pay MIP for the life of the loan.

In these cases, you could refinance your FHA loan to a conventional loan to stop paying mortgage insurance premiums.

2. When You Want a Different Loan Type

Refinancing can also make good sense if you want to change the kind of loan you have, since the way your current loan is structured cannot be changed.

For example, mortgages could be either fixed-rate loans or adjustable-rate loans, and you may start with one and want to switch to the other.

Change to a Fixed-Rate Mortgage

Taking out an adjustable-rate mortgage (ARM) sometimes makes sense because ARMs often have a lower starting rate than a fixed-rate loan. This starting rate is locked in for a period of time, such as five or seven years, but then your rate begins adjusting and moves along with a financial index.

Unfortunately, if you have an ARM and you think interest rates are going to go up, you risk your rate rising once it starts to adjust.

Since you can refinance an ARM to a fixed-rate mortgage, you may want to pursue a refinance loan before an anticipated rate increase. That way, you can lock in at today's rates and don't have to worry about your rate going up in the future once your mortgage begins adjusting.

Change to an Adjustable-Rate Mortgage

On the flip side, if you have a fixed- rate mortgage already, you may want to switch to an adjustable-rate mortgage.

You may decide to do this if you can get a new ARM at a much lower rate than you are currently paying, and you aren't worried that rates are going to go up in a few years.

3. When You Want Updated Loan Terms

Your loan terms are also set in stone when you borrow and the only way to change them is refinancing. There are a few key reasons why you may decide you need to change those original terms and that pursuing a new loan is a good way to do it.

Change Your Repayment Period

Refinancing can also make good sense if you want to save money by paying off your loan sooner.

For example, if you have 25 years left on your home loan, you might refinance to a 15-year mortgage. This could save you money because you are paying down the principal faster, which means you will pay less interest over the life of the loan. Your new loan, with the shorter term, may also have a lower interest rate, which would save you even more.

Keep in mind that shortening the life of your home loan will likely increase the amount you are required to pay each month. Keep in mind that refinancing is not usually necessary to pay off your home loan sooner. You can just choose to make extra mortgage payments instead.

However, before you make extra payments, check your loan terms to make sure you don't have a prepayment penalty. Freedom Mortgage home loans do not have prepayment penalties.

Add or Remove a Borrower

Some life circumstances allow you to assume a mortgage without refinancing, but typically, the most straightforward way to add or remove a borrower is by refinancing. Refinancing allows you to replace your old mortgage with a new one that adds or removes someone from the loan.

4. When You Want to Adjust Your Monthly Payment

When you took out your mortgage loan initially, you agreed to pay a set amount per month. If your loan was fixed, that amount won't change for your entire repayment period. If your loan was adjustable, the rate will change based on a formula set by your lender.

There may come a time, though, when you want to change that monthly payment amount entirely from what you initially agreed to pay. Refinancing allows you to do that.

Lower Monthly Payments

You can lower your monthly payments by refinancing to a new loan with a longer repayment timeline, a lower interest rate, or both. However, it's a good idea to look at the impact of lowering your monthly payment on the total amount of money you will pay in interest over time.

If you make your repayment period longer to lower your monthly payment, you could end up paying much more in interest over the life of the loan. This is true even if you refinance to a loan at a lower rate since you're paying interest for a longer period.

Make Your Monthly Payments More Predictable

Homeowners who have an adjustable-rate mortgage (ARM) sometimes refinance to a fixed-rate mortgage because they want the peace of mind that comes with knowing that their monthly mortgage payments won't change.

Having predictability allows you to better plan and budget, since you'll no longer have to worry about your costs increasing substantially if rates go up.

5. When You Want to Access Your Home Equity

Finally, if you want to take money out of your home, refinancing using a cash out refinance loan is one way you can do that.

Get Cash From Your Home's Equity

A cash out refinance allows you to replace your existing mortgage while tapping your home's equity. You'll apply for a new loan and borrow a larger amount than you currently owe, walking away with the extra cash at closing.

Some homeowners use cash out refinances to help them pay down other higher-interest debt. You can also use the money to pay for things like home improvements, college tuition, or other major expenses. Like other refinancing options, you typically must complete a new mortgage application and pay a new set of closing costs.

Consolidate High-Interest Debts

Cash-out refinance loans can come at a much lower rate than credit cards or other high-interest personal loans. This can make debt payoff much easier, and give you one monthly payment instead of several if you use the cash you take out of your home to pay off multiple debts.

You do need to be aware, though, that turning unsecured debt, like credit cards, into secured debt can be risky. If you can't pay your credit cards or personal loans, you are very unlikely to lose your home. If you can't pay your home loan after doing a cash out refi, you will inevitably face foreclosure. So be sure you can afford the new monthly payments before going this route.

Is Now the Right Time to Refinance Your Home?

Interest rates have been dropping in the second half of 2025, and there is an opportunity for many people to refinance at a lower rate.

If you are interested in learning how much money you might save by refinancing your home loan, you can use our refinance calculator to estimate your savings. Our calculator considers interest rates, closing costs, loan terms, and other factors to estimate how much money you might save and what your new monthly payment might be.

Freedom Mortgage is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions.

Last reviewed and updated September 2025 by Freedom Mortgage.