Quick answer: Homeowners refinance to lower their rate or payment, shorten their term, switch from an adjustable to a fixed rate, remove PMI, take cash out or consolidate debt. A refinance is worth it when your monthly or lifetime savings outweigh your closing costs before you plan to move or sell.
Refinancing replaces your current mortgage with a new one. It can lower your rate or payment, shorten your term, remove mortgage insurance or let you tap your equity, but closing costs and your time horizon matter. Here are the top reasons homeowners refinance.
1. Lower Your Interest Rate
A lower rate can reduce your payment and the total interest you pay.
- Example: On a $300,000, 30-year loan, going from 6% to 4.5% lowers the principal and interest payment from about $1,799 to about $1,520, saving roughly $279 a month.
2. Reduce Your Monthly Payment
You can lower your payment with a lower rate, a longer term, or both. Stretching the term lowers the monthly payment but can raise the total interest you pay.
3. Shorten Your Loan Term
If rates have dropped or your income has grown, refinancing to a shorter term, such as 30 years to 15 years, helps you pay off the loan faster and save interest. See our post on shortening your mortgage term for a full example.
4. Switch From an Adjustable-Rate to a Fixed-Rate Mortgage
If your adjustable-rate mortgage (ARM) is about to adjust, refinancing to a fixed rate can lock in a predictable payment.
Next step: Wondering if a lower rate would pay off for you? Tell us your current rate and balance and we will check.
No obligation. It only takes a few minutes.
5. Take Cash Out of Your Home Equity (Cash-Out Refinance)
A cash-out refinance replaces your mortgage with a larger one and pays you the difference in cash. Common uses include home improvements, paying off high-interest debt or funding education. Lenders limit how much you can borrow against your home, so the amount depends on your value, balance and loan program. See When Does Cash-Out Refinancing Make Sense?
6. Remove Private Mortgage Insurance (PMI)
If you bought with less than 20% down and your home has gained value, refinancing can eliminate PMI once your loan balance falls below about 80% of the home’s value. You may also be able to request PMI cancellation from your servicer without refinancing, and servicers must end it automatically when your balance is scheduled to reach 78% of the original value, so compare both options.
7. Consolidate High-Interest Debt
Some homeowners use a cash-out refinance, a home equity loan or a HELOC to pay off credit cards or personal loans. Home equity rates are usually lower than credit card rates, but the debt becomes secured by your home. See Cash-Out Refinancing to Pay Off Debt and Using Home Equity to Pay Off Credit Card Debt.
8. Remove a Co-Borrower After a Divorce
When one spouse keeps the home, refinancing in that person’s name alone is often needed to remove the other from the loan.
9. Take Advantage of an Improved Credit Score
If your credit score has improved since you got your loan, you may qualify for a better rate and terms.
How Do You Know If Refinancing Is Worth It?
Compare your closing costs to your monthly savings to find your break-even point, then ask how long you plan to keep the home and the loan. If you will move before you break even, refinancing may not pay off.
Thinking about refinancing? A loan officer can compare your current loan to today’s options and show you the numbers.
Frequently Asked Questions
When does it make sense to refinance?
When the savings from a lower rate, shorter term or removed mortgage insurance outweigh your closing costs within the time you expect to keep the loan.
How do I calculate my refinance break-even point?
Divide your total closing costs by your monthly savings. The result is the number of months until you recover the costs.
Does refinancing hurt my credit score?
A refinance involves a credit inquiry and a new loan, which can cause a small, temporary dip. Rate shopping within a short window is generally treated as a single inquiry.
Next step: The only way to know if refinancing is worth it is to compare your savings with your costs. We will calculate your break-even point and show you the numbers.
No obligation. You will answer a few quick questions about your refinance so we can offer you the best options. It only takes a few minutes.
Sources
- CFPB, When can I remove PMI from my loan?
Method: Payments and interest figures are calculated with the standard fixed-rate amortization formula. They exclude taxes, insurance, mortgage insurance and closing costs, and are examples, not offers.
Tithe Lending LLC | NMLS #2439006 | Equal Housing Lender. General information only; not a loan offer or financial, tax or legal advice.