When to refinance a mortgage? Key factors and timing tips

Smart timing of your mortgage refinance can save you thousands of dollars throughout your loan term and lower your monthly mortgage payment.

You may look to refinance for a lower interest rate, get cash out of your home, or change the terms of your loan (like switching from a fixed to adjustable rate mortgage).

When refinancing, timing matters - you could miss out on savings or pay extra closing costs if you refinance too early or late.

This piece will help you spot the right signs to refinance. You'll learn how to decide if refinancing your mortgage makes sense and whether it's the best money move for your situation.

What should you know before refinancing

Smart preparation makes a big difference in mortgage refinancing success. You need specific financial details to make the right choice about refinancing your mortgage rate or loan term.

The first step involves calculating the exact amount you plan to refinance. This number is a vital part because your new loan comes with closing costs between 2% and 6% of the total amount. To cite an instance, a $300,000 refinance could mean paying $6,000 to $18,000 in closing costs. These costs include appraisal fees, credit checks, origination fees and various processing charges.

Your next step focuses on how long you intend to stay in your home. This timeline helps calculate your break-even point - when savings exceed refinancing costs. The math is straightforward: divide total closing costs by monthly savings. To name just one example, see how $3,600 in closing costs with $100 monthly savings needs 36 months (three years) to break even. To make it easy, use Better's free refinance calculator to do the math for you. It'll help you gauge whether financial benefits outweigh the costs.

Your loan's current age needs careful attention. A new 30-year term might mean higher overall interest costs if you're already 10+ years into your current mortgage, even with lower monthly payments. This happens because interest takes up most of your early mortgage payments - the longer you've paid, the more goes toward principal instead of interest.

A full 30-year restart isn't your only option. Your lender can match the new loan's timeline with your current payoff schedule. Let's say your 30-year mortgage is 5 years old - you could get a 25-year term for your refinance instead.

Refinancing also gives you a chance to change your mortgage type. Converting to a fixed-rate mortgage might make sense if you started with an adjustable-rate mortgage (ARM) approaching its adjustment period. This switch protects you from future rate increases.

Ask your lender to calculate different scenarios before making your final decision. Look at how your current "all-in" monthly payment compares to potential new ones, including closing costs. Note that waiting for mortgage rates to drop by 1% isn't always necessary - even a half-point reduction could work well depending on your situation.

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Why refinance your mortgage?

Homeowners choose to refinance their mortgages for several good reasons. Most of these decisions come down to improving their financial situation.

Securing a lower interest rate is what drives most people to refinance. The old rule suggested you should only refinance when mortgage rates dropped 1% below your current rate. But these days, even a half-point reduction could make sense based on your circumstances. Most homeowners who want better mortgage rates go for a rate-and-term refinance. This lets them replace their existing mortgage with one that has better terms.

Tapping into your home equity with a cash out refinance is another great reason to refinance. Your property might have gained value, or you've paid off much of your mortgage. A cash-out refinance turns that equity into money you can use right away (use this calculator to see how much you could borrow and what your new monthly payment would be). This option puts cash in your hands quickly, but think it over carefully. You'll end up with a bigger loan that might mean higher monthly payments. That said, you can access the equity in your home with a HELOC or home equity loan, instead of a cash out refinance, if you want to keep your current interest rate.  

Changing your loan type helps homeowners with adjustable-rate mortgages (ARMs) who need more stability. To cite an instance, you might have started with a 5-year ARM at 6%. As that adjustment period gets closer, switching to a fixed-rate mortgage protects you from future rate increases.

Adjusting your loan term lets you rework your payment structure. Some homeowners switch from a 30-year to a 15-year term. This is a big deal as it means that they'll pay less interest over time, though monthly payments go up. Others stretch out their term to lower monthly payments, knowing they'll pay more interest overall.

Your long-term financial goals should guide your refinancing decision. These goals might include lower monthly payments, access to equity, stable payments, or paying off your home faster.

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When shouldn’t you refinance a mortgage?

Attractive interest rates don't always make refinancing the right financial move. You should think twice about refinancing if you plan to move in the next few years. The break-even point takes 2-3 years to reach, and this is a big deal as it means that savings exceed closing costs. Moving before this point will cost you money.

Your credit score is a vital part of this decision. Lower scores since your original mortgage might lead to higher interest rates that wipe out any benefits. As with career changes, things can get tricky because lenders want to see 2+ years of stable employment history.

The math becomes unfavorable when your loan balance is small or you're near the end of your mortgage term. You'll pay closing costs on a smaller amount and might extend your debt timeline. Any prepayment penalty on your current mortgage could wipe out the advantages of refinancing.

Consider your home's equity position carefully. Refinancing becomes nearly impossible if you owe more than your home's worth without bringing cash to closing. Many lenders require a 6-12 months waiting period if you've refinanced recently.

The current interest rate climate plays a big role. Mortgage rates change all the time, but refinancing makes little sense if current rates are nowhere near better than your existing rate. The new rate should be at least 0.5-0.75 percentage points lower to make the transaction worthwhile.

Remember that using home equity for unnecessary spending can put you at risk. While home improvements or debt consolidation might make sense, using your home equity for vacations or luxury items adds no value and could jeopardize your home.

Frequently Asked Questions

Homeowners often ask common questions while learning about mortgage refinancing options. Let's look at the answers to help you make better decisions about whether or not you should refinance your home.

What credit score do you need to refinance a mortgage?

Your credit score greatly affects your refinancing eligibility and interest rate. Most conventional refinances need a minimum score of 620, though some lenders want higher credit scores to give their best rates. FHA loans are more available to borrowers with fair credit, accepting scores as low as 580. Jumbo loans also have specific requirements for refinancing.

Borrowers with excellent credit scores (740+) get the most competitive interest rates. Building up your credit before refinancing might make sense if your score needs work. A small boost in your score can save you lots of interest money throughout your loan.

How soon can you refinance your home?

Your loan type and lender requirements determine when you can refinance your current mortgage. Most conventional mortgages let you refinance right after closing, but lenders usually want you to wait six months.

You'll need to own your home for at least six months to get a cash-out refinance. The same lender will ask you to wait 6-12 months after your last refinance before you can do it again.

Here are five tips to prepare for a refinance. 

How long do you have to wait to refinance after buying a home?

You typically need to wait at least six months after closing on your home to refinance, though the exact timing depends on your loan type and lender requirements. Conventional loans often have a six-month waiting period, while FHA loans may require up to 210 days and six months’ worth of on-time payments. That said, if you’re considering a cash-out refinance, most lenders will require you to own the home for at least 12 months. If mortgage rates drop or your financial situation improves soon after buying, refinancing could still be worthwhile—it’s just important to weigh the costs against the potential savings.

Will mortgage interest rates go down in 2025?

Many economists and market watchers expect mortgage rates to gradually decline in 2025 as inflation eases and the Federal Reserve considers cutting interest rates. However, rates are influenced by a wide range of factors, from economic growth to global events, so they’re notoriously hard to predict with certainty. If you're wondering if the housing market will crash in 2025, read this. 

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Conclusion

Refinancing your mortgage is a most important financial decision that needs you to think over multiple factors. This piece gets into when refinancing makes sense and when it might not be your best move.

The timing of your refinance is a vital part of the process. Your break-even point—when savings are more than closing costs—should line up with your planned stay in your home. On top of that, it all comes down to how your current interest rate compares to what's available now.

Your financial health plays an equally big role. A good credit score, steady job history, and enough home equity help you get better refinancing terms. Without these pieces in place, you might end up with poor terms or get turned down.

Refinancing does more than just lower your interest rates. Many homeowners use it to tap into equity, switch from adjustable to fixed rates, or change their loan terms. Each choice helps meet different money goals and situations.

With Better, you can see what your custom rates in as little as 3 minutes with no credit impact.

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