When and How to Refinance Your Mortgage

You’ve been in your home for a while now. You’re making payments on time, building equity — and maybe wondering if it’s time to refinance your mortgage.

Refinancing can be one of the smartest financial moves a homeowner makes. Done right, it can lower your monthly payments, shorten your loan term, or free up cash for renovations or debt payoff. Done wrong, it can cost more than it saves.

So how do you know when refinancing makes sense — and how do you do it the right way? Let’s break it down step by step.

Key Takeaways

✅ Refinancing replaces your existing mortgage with a new one, often to lower your rate or change your loan terms.

✅ The best time to refinance is when it saves you money after closing costs are considered.

✅ You generally need good credit, stable income, and at least 20% equity for the best terms.

✅ Shop multiple lenders — or upload your Loan Estimate to Fincast and let vetted lenders compete to beat your rate.

✅ Refinancing isn’t one-size-fits-all: your goals (monthly savings, faster payoff, cash-out) determine what’s right for you.

What Is Mortgage Refinancing? 🏦

Refinancing means replacing your current mortgage with a new loan — usually with different terms.

You can refinance with your current lender or a new one. The process is similar to applying for your original mortgage, but typically faster since you already own the home.

Common Reasons to Refinance

• Lower your interest rate and monthly payment

• Shorten your loan term (e.g., from 30 years to 15 years)

• Cash out equity for renovations, education, or debt consolidation

• Switch loan types (e.g., from adjustable-rate to fixed-rate)

• Remove PMI once you have 20%+ equity

💡 Pro Tip: Refinancing resets your loan — so even if you save on the rate, make sure it also reduces your total interest over time.

When Does Refinancing Make Sense?

Timing is everything. Refinancing may be worth it when it meets one or more of these conditions:

1️⃣ Interest Rates Have Dropped

A general rule: If you can reduce your rate by 0.5–1.0%, refinancing may make sense — depending on how long you plan to stay in your home.

💡 Example:

A $400,000 loan at 6.5% on a 30-year term refinanced to 5.5% on another 30-year term could save about $260/month — or over $9,000 in just three years.

• Examples are for illustration only. Actual rates and savings may vary.

2️⃣ You Plan to Stay in the Home for a While

Because refinancing has closing costs (typically 2–5% of the loan amount), you should calculate your break-even point — how long it takes for your monthly savings to offset those costs.

Example:

If you spend $5,000 to refinance and save $250/month, you break even in 20 months.

If you’ll stay longer than that, it may be worth it.

3️⃣ You’ve Built Significant Equity

Once you’ve paid down your loan (or your home’s value has risen), you may have enough equity to:

• Drop private mortgage insurance (PMI)

• Qualify for better rates

• Tap into the home’s equity using a cash-out refinance for debt consolidation or to cover major expenses

See Understanding Escrow Accounts for Taxes and Insurance to understand how PMI and escrow can impact your total monthly payment.

4️⃣ You Want to Change Loan Type or Term

You may want to change your loan type or term from the original that you chose when you bought the home, such as:

• Switching from an adjustable-rate (ARM) to a fixed-rate for stability

• Moving from a 30-year to a 15-year mortgage to pay off the loan faster

• Refinancing to remove a co-borrower after divorce or separation

💡 Pro Tip: Shorter loan terms mean higher monthly payments but much less interest over time.

When Refinancing Might Not Be Worth It ⚠️

Refinancing isn’t always the best move — especially if:

• You plan to sell soon and won’t reach your break-even point

• Your credit score has dropped since your original loan

• You have a prepayment penalty on your current mortgage

• You’ve recently taken on new debt or have unstable income

See Hidden Costs of Homeownership You Should Plan For for more on expenses that can eat into refinance savings.

Types of Mortgage Refinancing 🔄

Each type serves a different purpose — here’s a breakdown of the most common options:

1️⃣ Rate-and-Term Refinance

• Most popular type

• Change your interest rate, loan term, or both

• Does not involve cashing out equity

✅ Best for: Lowering payments or shortening payoff timeline

2️⃣ Cash-Out Refinance

• Lets you borrow more than your current balance and take the difference in cash

• Based on available equity (usually up to 80%)

✅ Best for: Home renovations, debt consolidation, or tuition

💡 See Top Smart Home Upgrades That Actually Add Value if you plan to reinvest that cash in your home.

3️⃣ Streamline Refinance

• Simplified option for FHA, VA, or USDA loans

• Minimal paperwork, faster approval, often no appraisal

✅ Best for: Borrowers with government-backed loans looking to lower payments quickly

How the Refinance Process Works (Step-by-Step)

Refinancing is straightforward when you know what to expect. Here’s how it unfolds:

Step 1: Set Your Goal

Decide why you’re refinancing — lower rate, shorter term, cash out, or debt consolidation. Your reason will shape your loan options.

Step 2: Review Your Credit and Equity

Check your credit score (aim for 680+) and calculate your loan-to-value (LTV) ratio:

LTV=Loan balanceHome valueLTV = \frac{\text{Loan balance}}{\text{Home value}}LTV=Home valueLoan balance

LTV = Loan amount/Asset Value

An LTV of 80% or lower usually qualifies for the best rates.

• Credit score and LTV requirements vary by lender, loan program, and market conditions.

Step 3: Compare Loan Offers

Get quotes from at least three lenders. Decide which lender offers the best option and submit your refinance application.💡 Pro Tip: Even a 0.25% lower rate may save you thousands over the life of your loan.

Step 4: Shop Your Loan Lock Your Rate

After you submit your loan application, the lender must issue a Loan Estimate within 3 business days. Use the LE to shop your loan and negotiate with other lenders to get the most competitive terms. You can shop manually or — better yet, upload your Loan Estimate to Fincast.

Fincast securely shares your estimate with vetted lenders who compete to offer better terms — without extra credit pulls or spam.

.When you’re ready, lock in your rate — rates can change daily.

Step 5: Appraisal and Underwriting

The lender orders a home appraisal to verify its current value, then reviews your financial documents (income, debts, assets).

Step 6: Review Your Closing Disclosure

You’ll receive a Closing Disclosure (CD) outlining your new terms, interest rate, and closing costs within three business days of your scheduled closing.

Compare it carefully to your Loan Estimate to confirm there are no surprises — see How to Read a Closing Disclosure, Line by Line for a detailed walkthrough.

Step 7: Close and Fund

You’ll sign the final documents, your old loan is paid off, and your new loan begins.

If it’s a cash-out refinance, you’ll typically receive funds after the three-day right of rescission period ends..

How Much Does It Cost to Refinance? 💵

Expect to pay 2–5% of your loan amount in closing costs, including:

• Application and underwriting fees

• Appraisal fees

• Title and escrow fees

• Recording and transfer taxes

💡 Pro Tip: You can often roll these costs into the loan or request “lender credits” to offset them.

Refinance vs. HELOC: What’s the Difference?

• Refinance: Replaces your entire mortgage with a new one.

• HELOC (Home Equity Line of Credit): A separate, revolving line of credit based on your home’s equity — good for smaller or ongoing expenses.

If you’re unsure which fits your goals, see How to Build a Home Emergency Fund to help you plan for future costs before tapping your equity.

FAQs

1. How soon can I refinance after buying my home?

Typically, after 6 months, though some lenders allow refinancing sooner.

2. Does refinancing hurt my credit score?

It’s usually a small, temporary dip from a credit inquiry, usually less than 5 points.

3. Can I refinance with bad credit?

It’s harder, but not impossible. FHA streamline programs or adding a co-borrower may help.

4. How long does refinancing take?

Usually 30–45 days from application to closing.

5. Is cash-out refinancing taxable?

No — you’re borrowing your own equity, not earning income.

Bottom Line

Refinancing your mortgage can be a powerful financial move — but only when the math makes sense.

You’re ready to refinance when:

✅ You can lower your rate by at least 0.5–1.0%

✅ You plan to stay long enough to reach your break-even point

✅ You’ve built 20%+ equity

✅ You’ve compared multiple lenders or used Fincast to find the best deal

With the right timing, refinancing may cut years off your loan and thousands off your interest costs — helping you keep more of your money for what matters most.

Action Checklist

• Define your refinance goal (rate, term, cash-out, etc.)

• Check your credit and equity position

• Get at least three quotes and apply for the best loan

• Calculate your break-even point

• Upload your Loan Estimate to Fincast

• Review your Loan Estimate and competing offers

• Choose your lender and provide supporting documentation

• Review your Closing Disclosure line by line

• Use your monthly savings to build your Home Emergency Fund

👉 Ready to see if refinancing could save you money?

Upload your Loan Estimate to Fincast — where vetted lenders compete to help you lower your rate, reduce your term, or free up equity for your next chapter of homeownership.