The pros and cons of refinancing your home: Is it right for you?

Refinancing a home loan can be a smart move, but only under the right conditions. It could help you secure a lower interest rate or reduce your monthly mortgage payments — or it could cost you more than it saves.

Explore the pros and cons of refinancing your home, find out how this type of mortgage works, and learn when it might be a good option (and when it might not).

What does refinancing a mortgage mean?

Refinancing a mortgage means replacing your existing home loan with a new one, typically with different terms. When you refinance, your new lender pays off your old loan, and you start making payments on the new mortgage instead. This is different from second mortgages like home equity loans and home equity lines of credit (HELOCs), which you hold alongside your first mortgage rather than swapping it.

There are different types of mortgage refinances. These include rate-and-term refinances, which adjust the interest rate or loan length, and cash-out refinances, which let you tap into your home’s equity. The most common reasons homeowners refinance are to get a better interest rate, lower their monthly payments, reduce or increase their loan term, change their loan type, or access home equity.

Benefits of refinancing your home

Here are some of the pros of refinancing your home if it makes sense for your situation:

Get better interest rates

If mortgage rates have dropped since you bought your home or your credit score has significantly improved, you may qualify for a lower interest rate.

Change your loan terms

If you want to adjust the terms of your mortgage, you have a few different options:

— Refinancing to a shorter loan term: Switching from a 30-year to a 15-year mortgage typically means you'll pay less interest overall. While your monthly payments may go up, you could grow your equity faster and pay off your mortgage sooner.

— Refinancing to a longer loan term: If you're looking to reduce your monthly payments, refinancing to a longer loan term is one way to do it.

— Switching from a variable to a fixed rate: If you have an adjustable-rate mortgage (ARM), refinancing to a fixed-rate mortgage gives you predictable payments and keeps your interest rate the same — no matter what's happening in the market.

Tap into your equity

A cash-out refinance lets you borrow against the equity you've built up in your home. You can typically take out up to 80% of your home’s equity in cash, minus your remaining mortgage balance. The funds can be used for any purpose, but home improvements, tuition costs, and consolidating debt are some of the most popular.

Stop paying for private mortgage insurance

If you put down less than 20% when you bought your home, you’re probably paying for private mortgage insurance (PMI). Lenders have to cancel PMI once you’ve reached 22% home equity, but you can request removal at 20% or get rid of it completely by refinancing when you have at least 20% equity.

Add or remove co-signers

If you purchased your home with a co-borrower, like a former spouse, you can refinance to remove them from the mortgage. You can also add someone else, like a new partner with strong income and credit, to potentially qualify for better loan terms.

Better makes it easy to refinance your home with a fully online application process and no hidden fees. Get pre-approved in 3 minutes to unlock low rates and real savings — no phone call required.

...in as little as 3 minutes – no credit impact

Disadvantages of refinancing a home loan

Like any type of mortgage, refinancing has its drawbacks. Here are some of the cons of refinancing a home loan:

Closing costs

Mortgage refinancing costs money, with closing costs often 2–5% of your loan amount. Some lenders may advertise a “no-cost refinance,” but that typically just means the fees are rolled into the loan balance.

More overall interest paid with longer terms

Refinancing to a longer loan term can lower your monthly payment, but it might also increase the total amount of interest you pay.

Bigger monthly payments with shortened terms

If you refinance from a 30-year to a 15-year mortgage, your monthly payment will likely go up. You could see an increase of several hundred dollars, depending on the rate you get. That could be hard to manage without an increase in income or budget flexibility.

Higher debt-to-income ratio with a cash-out refinance

Taking cash out of your home with a cash-out refinance means taking on more debt. Since you’re increasing your loan balance, it raises your debt-to-income (DTI) ratio, which measures how much you owe compared to how much you earn. This could make it more difficult to qualify for future credit, like a car loan or a mortgage for a second property.

Temporary credit hit

Applying for a refinance triggers a hard credit inquiry, which can impact your credit score. It's usually a small change and should clear up fast, but it's something to keep in mind if you're planning to apply for another large loan or line of credit in the near future.

When should you refinance your home?

There’s no universal answer for the perfect time to refinance a home, but there are several scenarios where it makes sense.

One of the clearest signs it might be time to refinance is when market interest rates have dropped since you took out your original mortgage. If you can secure a lower interest rate, you can save serious money. Try using a refinance calculator to see how much.

Improved credit is another good reason to revisit your mortgage, since a higher credit score can give you access to better rates and loan terms. But sometimes the motivation is about timing rather than savings. If your financial situation has improved, refinancing into a shorter loan term can help you pay off your mortgage faster and reduce how much you pay in interest, though your monthly payments will likely go up. Refinancing into a longer loan term, on the other hand, can lower your monthly payments and create more breathing room.

Refinancing can also bring stability. Homeowners with adjustable-rate mortgages may want to switch to a fixed-rate loan to lock in consistent payments and avoid future rate hikes.

When should you avoid refinancing?

Refinancing can be a useful tool, but it isn’t right for everyone. In some situations, it could actually work against your financial goals.

First, refinancing comes with fees. If the long-term savings don’t outweigh those upfront expenses, it might not make financial sense to refinance, especially if you plan to sell or move in the near future.

If your credit score has dropped since you got your original loan, refinancing could mean higher interest rates — not lower ones. In that case, you might end up with a less favorable mortgage than the one you already have.

You might also want to explore other options if your income is less stable or predictable than when you bought your home, since lenders may see you as a higher-risk borrower. That could lead to higher rates or make it difficult to qualify for a refinance in the first place.

Refinancing simplified with Better

There are good reasons to refinance, and there are good reasons to wait. If you’re leaning toward refinancing, a digital refinance with Better lets you weigh your options with no hidden fees, transparent rate comparisons, and expert support every step of the way. 

See how much you could save by filling out a short questionnaire and getting pre-approved in as little as three minutes. 

...in as little as 3 minutes – no credit impact