How to decide when to refinance your mortgage

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Refinancing¹ your mortgage lets you replace your existing home loan with a new one. That gives you the opportunity to change lenders or adjust details about your loan, such as the interest rate or repayment term or take equity out of your home by  refinancing to a loan with a larger balance.

Refinancing can be a good way to lower your monthly payment, save money on interest, or turn equity into cash you can use for other purposes. We’ll break down when refinancing might be a good move and how to decide if it’s right for you.

If interest rates are lower

One of the most important things to pay attention to about your mortgage is its interest rate. The interest rate describes the cost of borrowing money. The higher the rate, the more you pay each month and over the long run for your loan.

Mortgage rates can fluctuate based on many factors, so if interest rates have dropped since you got your loan, refinancing may let you lower your loan’s rate. This can be especially handy if you have an adjustable-rate mortgage that is about to exit its introductory period and reset to a higher rate.

Imagine you have a 30-year mortgage for $350,000 at an interest rate of 7%. Your monthly payment for principal and interest would be $2,328.56. After five years, your balance would have fallen to $324,854.01.

If you refinance to a new mortgage that keeps the same payoff schedule but has a rate of 5%, your payment would fall to $1,899.06, saving you a bit more than $400 per month.

As a bonus, if you now have more than 20% equity or move from an FHA loan to a conventional loan, refinancing can let you remove mortgage insurance.

A common rule of thumb when considering refinancing is the 2% rule. The rule states that it is likely only worth it to refinance if you can lower your interest rate by 2% or more. Otherwise, the savings from refinancing would not be enough to counteract the fees you pay to get a new mortgage.

If you need to access your home equity

Your home equity is the value of your home minus the remaining balance of your mortgage. It’s an asset of value that you have, but you can’t spend your home equity like you can spend cash.

Refinancing gives you the opportunity to use your home equity for another purpose.

Imagine you have a home worth $400,000 and a mortgage of $250,000. You could use a cash-out refinance to a new mortgage of $300,000 and access to $50,000 in equity that you could use to pay off other debts, cover home improvements, or for other purposes.

Increasing your loan’s balance does mean increasing your monthly payment and the overall cost of your mortgage, but you may decide it’s worth doing if you can use your equity in another way.

If you’d rather avoid refinancing, you can also tap your home equity using a home equity loan or home equity line of credit (HELOC). Both are types of second mortgages. Home equity loans give you a lump sum of cash you can use, while HELOCs are a credit line you can tap multiple times on an as-needed basis, offering some flexibility. The funds can be used for remodeling your home, consolidating debt, or other things.

Before you consider cashing out some of your home equity, consider getting a home appraisal so you know exactly how much equity you have.

If you want to switch loan types

When you refinance, you can get an entirely new type of loan. For example, if you had an FHA loan, which is usually aimed at people with less savings and lower credit, you could refinance to a conventional loan, which may have better rates and let you avoid paying for mortgage insurance.

You could also trade in your adjustable-rate mortgage (ARM) for a fixed-rate loan. ARMs often have lower rates than fixed-rate mortgages at first, but after the introductory period ends, the rate will rise or fall along with market interest rates. In some cases, the rate of your ARM and your monthly payment could rise to the point of being unaffordable.

Refinancing to a fixed-rate loan gives you a chance to secure some certainty and peace of mind by ensuring that your principal and interest payment won’t change over the life of your loan.

If you want to change your loan’s terms

When you get a loan, you can usually choose its term as long as the amount of the payments fits with your lender’s guidelines of what’s affordable given your overall financial picture.

Refinancing may give you the opportunity to choose a new term, which can mean lengthening it or shortening it.

Choosing a longer term means it’ll take more time to pay off your mortgage and to own your home free and clear. However, it usually lets you reduce your monthly payments, which can offer budget flexibility or let you dedicate more money to other goals, like investing.

On the other hand, loans with shorter terms usually have lower interest rates. They also let you build equity more quickly and pay off your loan sooner. Since shorter-term loans are paid off faster, they have higher monthly payments.

If you’ll benefit financially

Ultimately, the key question to ask yourself before you refinance is whether you’ll benefit financially from replacing your mortgage with a new one.

Benefitting can mean anything from lowering your monthly payment to shortening the loan’s term so you can get out of debt more quickly.

However, it’s important not to spread yourself too thin. If you refinance to a shorter term and boost your monthly payment, you might struggle to afford higher payments and face foreclosure or be unable to achieve other financial goals, like saving for a car or retirement.

Look at your total financial picture and think about how refinancing will change your finances. Will you save money over the long run or each month? Can you handle the new payment? If you think it’ll have a positive financial impact overall, refinancing makes sense.

Am I eligible to refinance?

You’ll need to meet eligibility requirements if you want to refinance your mortgage. These requirements will vary based on the lender you work with. You can expect most lenders to use the same information during the approval process. You will have to provide them with details about your income, credit score, assets, debt, and more.

Here are some of the refinancing requirements you may need to meet while applying:

• A higher credit score (580 and above)²
• At least 20% equity in your home in the case of a cash-out refinance
• A lower debt-to-income ratio (usually 43% or lower)

Depending on the type of loan refinancing you apply for, you may be able to have less than 20% equity in your home. Even if the lender doesn’t require that you have 20% equity in your home, you may not be able to take out cash unless you have an excellent credit rating, and you may need to accept mortgage insurance or a higher interest rate.

How much will it cost to refinance my home?

Generally, you should expect to pay from 3% – 6% of your loan’s total value when refinancing. This amount will cover your overall closing costs, which include stuff like attorney fees and title insurance. Some homeowners, however, may be able to roll their refinance closing costs into their overall loan balance, depending on the lender, the loan type, and the amount of equity available.

The type of refinancing terms you look for should depend on your financial situation. Just know that you’ll now be paying interest on closing costs, and you may need to accept a higher mortgage rate in exchange. For help in making this determination, you can use this refinancing calculator from Rocket Mortgage.

FAQ

Whether or not to refinance is a big decision, so make sure to consider every angle before you sign on the dotted line.

When is it worth it to refinance?

Refinancing is worth doing when you can save money or benefit financially. For example, if interest rates have fallen, you might be able to refinance to a new loan with a lower rate, saving you money each month and over the life of the loan.

How much should interest rates drop to refinance?

A popular rule of thumb is the 2% rule, which says that refinancing can be a good idea if rates have dropped by at least 2% compared to your current loan’s rate.

Are refinance rates going down?

Mortgage rates can fluctuate based on many factors. In the past five years, rates peaked at an average of 7.79% in October 2023 and have been on a slow decline since, dropping below 6% in February 2026.

How long does refinancing take?

Refinancing a mortgage can be a lengthy process, often taking between 30 and 45 days from start to finish.

What is the smartest way to pay off a mortgage?

The smartest way to pay off a mortgage is the one that works for your financial situation. For some people, that can mean following the payment schedule, while for others it can mean making an extra payment or refinancing to extend their loan’s term to secure a lower monthly payment.

If you’re curious to see if your budget would allow you to refinance for a shorter term, you can use the mortgage payoff calculator from Rocket Mortgage to calculate whether refinancing meets your financial goals.

The bottom line: Answer tough questions before choosing to refinance

Refinancing a mortgage can be a long and expensive process, so you need to consider all of the angles before going through with it. Often, refinancing can help you save money by lowering your mortgage interest rate or can lower your monthly payment by extending the loan’s term. Consider your goals before refinancing, and make sure that refinancing will actually help you achieve them.

Once you’re ready to start the refinancing process, you can reach out to Rocket Mortgage³ to learn more about rates and terms that may be available.

¹ Refinancing may increase finance charges over the life of the loan.

² To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

³ Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.