Why Should I Refinance
People refinance to lower their rate or payment, shorten the term, take cash from equity, drop mortgage insurance, change loan types, or move from an adjustable rate to a fixed rate. A refinance is worth it only if the benefit outlasts the closing costs and fits your long-term plans.
Key Takeaways
- Start with the goal. The reason you refinance decides which loan fits.
- Lowering the payment and lowering the total cost are different goals and can pull in opposite directions.
- Good reasons include a lower rate, a shorter term, dropping PMI or FHA mortgage insurance, and leaving an adjustable rate.
- Poor reasons include chasing a small rate drop, restarting a 30-year clock for a tiny payment cut, or taking cash with no plan for it.
What are the main reasons to refinance?
Lower your interest rate or payment
Interest makes up most of your payment in the early years of a mortgage. A lower rate cuts that cost. The lower payment can free up monthly cash for savings, debt payoff or other goals. Run the numbers with the break-even calculator before you decide, because the closing costs come first and the savings come later.
Shorten your term
Moving from a 30-year loan to a 20-year or 15-year loan usually brings a lower rate and much less total interest, but the monthly payment rises. This is a good fit if your income has grown and you want to be mortgage-free sooner. See rate-and-term refinance for a worked comparison.
Take cash out of your equity
A cash-out refinance replaces your loan with a larger one and pays you the difference. Homeowners use it for repairs, an accessory dwelling unit, education costs or to consolidate higher-interest debt. The trade-off is a bigger balance and, often, a new rate on your entire loan.
Drop mortgage insurance
If you pay private mortgage insurance (PMI) on a conventional loan and your home has gained value, a new appraisal may show you are at or below 80% of value. A new loan at that level generally has no PMI. If you pay FHA mortgage insurance, refinancing into a conventional loan once you have roughly 20% equity can remove it. Read the PMI guide and compare removal on your current loan with refinancing, because removal can be cheaper.
Change your loan type
Some homeowners move from an FHA loan to a conventional loan, or from a conventional loan to a VA loan if they are eligible. The right move depends on credit, equity and the cost of insurance or funding fees. The VA IRRRL vs. conventional refinance guide shows one common comparison.
Move from an adjustable rate to a fixed rate
An adjustable-rate mortgage (ARM) starts with a fixed period, often five, seven or ten years, then adjusts with the market. If your fixed period is ending and you plan to stay, a fixed-rate loan gives you a payment you can count on. The new fixed rate may be higher than your current ARM rate, so the goal here is certainty, not a lower payment.
When should you not refinance?
- You may sell soon. If you move before the break-even point, you lose money. See factoring in the costs.
- The savings are small. A rate drop that saves $40 a month rarely covers closing costs of several thousand dollars within a reasonable time.
- You would reset a long term. If you are 10 years into a 30-year loan and refinance into a new 30-year loan, you add 10 years of payments. The monthly payment drops, but the total interest you pay may rise.
- You have a very good rate today. A cash-out refinance replaces it. A HELOC or home equity loan may let you keep your first mortgage in place.
- You have a prepayment penalty. Check your note first.
- Your credit or income has weakened. You might qualify for a worse deal than you have now.
How do I know which reason applies to me?
Write down what you want the refinance to do in one sentence. Then test it:
- Will the new loan accomplish that goal, and by how much?
- What will it cost to close, and how long until I earn that back?
- How long will I realistically keep the home?
- What happens to my total interest and my payoff date?
If the answers line up, move on to when you can refinance and what to consider before refinancing. The full chapter is on the refinancing a home page.
At Lendia, we help you test the reason first
At Lendia, we compare your current loan with options from multiple lenders and show you the monthly effect, the break-even and the total interest side by side. If refinancing does not help, we will tell you. Contact us or get a rate quote now.
Frequently Asked Questions
What is a good reason to refinance?
A good reason is a clear benefit you will keep long enough to repay the costs: a meaningfully lower payment, a faster payoff, lower mortgage insurance or a safer loan structure. Cash for a worthwhile purpose can also qualify.
Is it worth refinancing for a small rate drop?
Sometimes, but not always. There is no single rule. Compare your closing costs with your monthly savings and your plans for the home. Use the break-even calculator rather than a rate-drop rule of thumb.
Can I refinance to get rid of PMI?
Often yes, if your balance is at or below about 80% of the current value and you qualify. You can also ask your servicer to remove PMI without refinancing once you reach 80% of the original value and have a good payment history.
Should I refinance from an ARM to a fixed rate?
If your adjustment date is near and you want a stable payment, a fixed rate can be worth it, even at a somewhat higher rate. If you will sell before the adjustment, you may not need to.
Does refinancing restart my 30-year clock?
If you choose a new 30-year term, yes. You can pick a shorter term or make extra principal payments to keep your original payoff date.
Rates and terms depend on your situation; approval requires qualification.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.