When to Refinance Your Mortgage

Common Reasons for Refinancing

Homeowners refinance for many different reasons, from lowering their monthly payment to borrowing cash from their home equity. Here are some of the most common situations where refinancing may make sense.

Lower Your Interest Rate

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 lower than the rate on your current mortgage so that refinancing makes sense after you pay any required closing costs.

To see how much money you might save by refinancing your home loan with a lower rate, check out 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.

Reduce Your Monthly Payment

You can lower your monthly mortgage payments by refinancing to a new loan with a longer repayment timeline (known as the mortgage term), a lower interest rate, or both. However, it's a good idea to compare the impact of lowering your monthly payment on the total finance charges as they may be higher over the life of the loan.

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 sometimes true even if you refinance to a loan at a lower rate since you're paying interest for a longer period.

Remove Mortgage Insurance

You might also choose to refinance to stop paying private mortgage insurance (PMI) on your conventional loan. However, with a conventional loan, you can sometimes remove 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%.

If an area experiences a significant housing price increase, your home equity may rise to 20% much earlier than if measuring home equity by paying down your loan principal only. It could be in your best financial interests to request an appraisal, and if the value meets PMI equity requirements you can have your lender stop PMI immediately. You’ll often save several months (or more) of PMI payments.

With an FHA loan, the rules for mortgage insurance are different. If you’ve received an FHA loan in the recent past, you’ll have to pay mortgage insurance premiums (MIP) for at least 11 years. Plus, depending on your down payment amount (if it’s less than 10%), you may have to pay MIP for the life of the loan.

In these cases, if you have the required amount of home equity you could refinance your FHA loan to a conventional loan to stop paying mortgage insurance premiums.

Switch Between an Adjustable or Fixed Rate

Taking out an adjustable-rate mortgage (ARM) sometimes makes sense because ARMs often have a lower initial rate than fixed-rate loans. This starting rate is fixed for a period of time (typically 5, 7, or 10 years), after which your mortgage rate can go up or down, based on a financial index.

Homeowners with an ARM sometimes refinance to a fixed-rate mortgage for the peace of mind that comes with predictable monthly mortgage payments. 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.

On the flip side, if you have a fixed-rate mortgage already, you may want to switch to an adjustable-rate mortgage if you can get a new ARM at a lower rate than you’re currently paying, especially if mortgage rates aren’t expected to rise in a few years.

Pay Off Your Mortgage Faster

Refinancing can also make 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’re paying down the principal faster, which means you’ll pay less interest over the life of the loan. Your new loan, with the shorter term, often also has 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’re required to pay each month. And sometimes refinancing is not the best financial choice 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 never 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 to refinance. Refinancing allows you to replace your old mortgage with a new one that adds or removes someone from the loan.

Access Your Home Equity with a Cash Out Refinance

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 more affordably make home improvements, pay for college tuition, or fund other major expenses. Like other refinancing options, you typically must close on a new mortgage and pay closing costs.

Consolidate High-Interest Debts

Cash out refinance loans typically come at a significantly lower rate than credit cards or other high-interest personal loans. This can make debt payoff much easier and more affordable, giving you one monthly payment instead of several.

It’s important to be aware, though, that converting unsecured debt, like credit cards, into secured debt can be risky. If you can’t comfortably afford your home loan payment after doing a cash out refi, you’ll potentially face problems. So be sure you can afford the new monthly payments before going this route.

When to Reconsider Refinancing Your Mortgage

You want to take advantage of the money-saving benefits that can come with refinancing, but it might not always make sense. Consider these situations where refinancing may not make sense:

• Your closing costs are too high: Refinancing typically comes with upfront costs that can take years to recover through monthly savings.
• You plan to move soon: If you expect to sell your home or relocate in the near future, you may not stay long enough to reach your refinance break-even point.
• Your current rate is lower than the refinance loan: Refinancing may provide limited savings if today’s rates are similar to your existing mortgage rate.
• Refinancing would extend your loan term too much: Lower monthly payments can be appealing, but restarting a long loan term could increase the total interest you pay over time.
• You may not qualify for better loan terms: Changes to your credit score, income, debt, or home equity could affect your ability to secure a lower rate or more favorable refinance terms.
• Your financial goals don’t align with refinancing: Depending on your situation, making extra mortgage payments or exploring other financial options may make more sense than refinancing.

Even if now isn’t the right time to refinance, that doesn’t mean the opportunity won’t arise down the road for you when circumstances change.

When to Refinance Your Home Loan FAQs

Here are answers to some frequently asked questions about how to know when it’s the right time to refinance your mortgage:

When Is the Best Time to Refinance a Mortgage?

The best time to refinance depends on your financial goals, current mortgage rates, and how long you plan to stay in your home (or mortgage). Many homeowners consider refinancing when interest rates drop, their credit improves, or they want to change their loan term or monthly payment.

How Much Should Rates Drop to Make Refinancing Worth It?

There’s no single rate reduction that makes refinancing worthwhile for every homeowner. Even a small interest rate drop could lead to meaningful savings, depending on your loan balance and closing costs.

When Should You Avoid Refinancing?

Refinancing may not make sense if closing costs outweigh the savings, current rates aren’t lower, or you plan to move soon. It may also be less beneficial if refinancing substantially extends your loan term.

How Long Should You Plan to Stay in Your Home Before Refinancing?

You should aim to stay in your home long enough to reach your refinance break-even point, which is when interest savings exceed the upfront closing costs. Depending on your mortgage rate, mortgage balance, and closing costs, this could take several years. If you expect to move prior to reaching your refinance break-even point, it might not make financial sense to refinance.

Final Thoughts: Is Now the Right Time to Refinance Your Home?

Interest rates dropped in the second half of 2025, and many homeowners were able to take advantage of that rate drop to refinance and achieve their financial goals. There could be an opportunity for you to save money with a refinance at a lower rate, too. Knowing when to refinance your mortgage can help you know if it makes sense right now or if you should wait.

If you’re ready to move forward with a refinance, start the process today with Freedom Mortgage to see your refi loan options and personalized rates. We’ll help you make the most affordable and right moves toward your financial goals.

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.