When mortgage rates plunge, many homeowners decide to refinance their home loans. While mortgage refinancing activity rose a few years ago with lower interest rates, it may not always be the best time to refinance. Knowing when you should refinance in your specific situation is critical. This article will tell you what you need to know about mortgage refinancing, when you should do it, and when you may want to hold off.
7 Signs It’s Time to Refinance Your Home
Refinancing your home mortgage can be a smart financial move, but timing is everything.
When done strategically, refinancing can save you thousands of dollars, lower your monthly payment, or even help you tap into your home’s growing equity.
However, refinancing at the wrong time—or for the wrong reasons—can cost more in the long run.
Here are seven signs that it might be the right time to refinance your home.
1. Interest Rates Have Dropped
One of the clearest signals that it’s time to refinance is a significant drop in mortgage interest rates. Even a 0.5% to 1% decrease can lead to substantial savings over the life of your loan. If current rates are lower than when you originally financed your mortgage, it may be time to lock in a better deal.
Case Study: Mark and Susan purchased their California home in 2020 with a 4.5% interest rate. In 2025, they noticed rates had dropped to 5.75%. By refinancing their $350,000 mortgage, they reduced their monthly payment by $220 and saved nearly $50,000 in interest over the loan term.
2. Your Credit Score Has Improved
Your credit score directly influences the mortgage rate a lender will offer. If you’ve improved your credit profile since your original loan—perhaps by paying off debt, disputing errors, or consistently paying on time—you could qualify for a significantly better rate through refinancing.
Pro Tip: Many lenders offer free prequalification to check if your improved score could get you a better deal without impacting your credit with a hard inquiry.
3. You Want to Refinance to Switch Loan Types
When you first bought your home, you may have chosen an adjustable-rate mortgage (ARM) for the lower initial rates. But now that rates are rising, it might be time to refinance into the security of a fixed-rate mortgage. Locking in a steady payment can protect you from future rate hikes.
4. You Want to Refinance to Shorten Your Loan Term
Refinancing into a shorter loan term, such as moving from a 30-year to a 15-year mortgage, can help you pay off your loan faster and save thousands in interest. Although monthly payments may be slightly higher, the long-term savings and faster equity buildup can be worth it.
Case Study: John, a homeowner in Texas, refinanced his $250,000 mortgage from a 30-year loan at 5.25% to a 15-year loan at 4.50%. His monthly payment increased by $320, but he shaved 15 years off his loan and saved over $80,000 in interest.
5. You Need to Tap into Home Equity
Home values have risen dramatically over the past few years, leaving many homeowners sitting on significant equity. Refinancing through a cash-out refinance allows you to borrow against your equity, using the funds for renovations, investments, debt consolidation, or emergencies.
However, it’s essential to evaluate carefully whether cashing out makes sense based on your future plans and risk tolerance.
6. You Want to Consolidate Debt with Refinance Mortgage
Mortgage rates are usually much lower than rates on credit cards and personal loans. If you’re juggling high-interest debt, a refinance could consolidate everything into a lower-rate mortgage, dramatically reducing your total monthly payments and interest costs.
For instance, someone paying 20% APR on credit cards might find significant relief by rolling that debt into a 6.5% mortgage refinance.
7. You Plan to Stay in Your Home Long-Term
Because refinancing comes with closing costs (typically 2%–6% of the loan amount), it’s most beneficial if you plan to stay in the home long enough to recoup those costs. This breakeven point is usually between 2–5 years, depending on how much you’re saving monthly.
If you’re planning to move soon, refinancing may not make sense unless the savings are immediate and significant.
Recognizing the right time to refinance your mortgage could lead to thousands of dollars in savings, lower monthly payments, and greater financial flexibility. However, refinancing isn’t free—it involves closing costs, paperwork, and sometimes extending your loan term. That’s why it’s essential to weigh the pros and cons carefully and evaluate how long you intend to stay in your home.
If you spot one or more of these seven signs in your financial situation, it might be time to connect with a mortgage advisor to explore your refinancing options. Timing and preparation are everything when it comes to getting the best deal.
When Refinancing Is a Smart Move
If refinancing your home loan will save you money, build equity, and pay off the loan faster, it’s a smart move. With 30 year refinance mortgage rates in the 2.5% range at the end of 2020, even people with a new home loan might benefit from doing a refinance.
Many financial experts advise considering a refinance if you can drop your interest rate by .5% to .75%. Lowering your rate by this much can substantially decrease your payment.
However, check that your total savings per month offset the cost of getting a new loan. Refinancing may be a wrong move if you intend to move in the next 24 months. In this situation, you don’t have enough time to recoup your refinance costs.
The question of when to do a refinance is not merely about interest rates, though. A critical factor is whether your credit score is high enough to qualify for the right loan. Mortgage loan rates are set by several market factors, such as yields on specific Treasury notes. Naturally, the lowest rates and terms are reserved for people with the highest credit scores.
Other factors to consider are your financial goals, how long you will stay in the home, how much equity is in the property, and your general financial condition.
Is Refinancing Worth The Trouble and Cost?
There are many ways you can refinance your mortgage. Finding the best loan for your situation hinges on your goals. If you have an adjustable-rate mortgage, you may want to switch to a fixed-rate home loan now, given you can get a refinance rate as low as 2.5%.
Or, perhaps you want to reduce the loan term from 30 to 15 years. Yes, your payment will rise by 30% or so, but you will save thousands in interest charges over the years.
A mortgage refinance also is useful to eliminate private mortgage insurance if you have 20% equity in the property.
Many homeowners choose a rate and term refinance that reduces their rate and gives them a lower monthly payment. Some homeowners may desire a lower payment to provide them with more cash for other costs, such as a car loan or college tuition.
What About A Cash-Out Refinance Mortgage?
Some homeowners choose a cash-out refinance mortgage. This loan involves borrowing more than you owe on the property. Common uses for the excess cash include paying off credit card debt, paying for home remodeling, or paying for college tuition.
Paying off high-interest loans with low-interest home equity can make sense. But if you start using credit cards again, you now have a higher mortgage and credit card bills also.
The property secures your home loan, so if you miss mortgage payments, you could face foreclosure. Just remember, if you take out equity, you are putting your home at risk if you cannot pay the higher loan.
How Long To Recoup Refinancing Costs?
Your new interest rate is not the only cost to consider when weighing whether you should refinance. It costs thousands of dollars to take out a new mortgage. Many financial experts say you should expect to pay 2-5% of the loan principal in closing costs.
For example, if you take out a loan of $200,000 and have 3% in closing costs, you will owe $6,000 when the loan closes. You can roll that cost into the principal, but remember you will pay interest on your closing costs for years.
To determine if your refinance makes financial sense, you should calculate how long it takes for the loan cost to pay for itself. If you intend to sell the home before you break even, you will lose money on the refinance, so it may not be worth it.
To find out what your break-even point is, divide your total loan costs by the amount you will save each month with the new loan payment.
Break-Even Point Example
For example, say the new home loan saves you $190 each month, and you have $3,000 in closing costs. When you divide your closing costs by $190, it will take you approximately 15.5 months to break even. If you want to sell the home before the break-even point, refinancing is not worth the cost.
How Long To Refinance Your Mortgage?
The time to refinance your home depends on the mortgage lender. Also, important factors are how long inspections take, credit checks, home appraisals, and other loan requirements. You can check lender websites to find various home loans, check interest rates, complete applications, and submit required documentation.
The good news is technology has improved in the mortgage industry, so the loan application process has been streamlined.
With such conveniences as online mortgage applications, document-signing applications on smartphones, and e-signatures, you can do most loan application requirements without printing anything. Times vary, but the average refinance takes about a month.
Summary
Low interest rates in 2020 make many homeowners decide to refinance, but it is essential to consider other factors before deciding to pull the trigger. How long you intend to live in the home, your credit score and your financial goals should be taken into account as well before you decide to refinance.
If you do refinance, getting the deal done quickly has never been easier, and there are many mortgage refinance companies eager for your business.
References
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
More articles by RefiGuide