When Should You Refinance Your Mortgage? A Complete Guide

Refinancing your mortgage can save you thousands of dollars—or cost you money if done at the wrong time. With over 24 years in the mortgage industry, I've helped countless homeowners determine when refinancing makes sense and when it doesn't. Here's everything you need to know.

What Is Mortgage Refinancing?

Refinancing means replacing your current mortgage with a new one, typically with different terms. The new loan pays off your existing mortgage, and you start making payments on the new loan with its new rate, term, and conditions.

Types of Refinancing

Rate-and-Term Refinance changes your interest rate, loan term, or both, without taking cash out. This is the most common type, aimed at lowering your monthly payment or paying off your loan faster.

Cash-Out Refinance replaces your mortgage with a larger loan, giving you the difference in cash. You might use this for home improvements, debt consolidation, or other major expenses.

Cash-In Refinance involves bringing money to closing to reduce your loan balance, often to eliminate mortgage insurance or qualify for better rates.

When Refinancing Makes Sense

Refinancing isn't always the right move. Here are the scenarios where it typically makes financial sense:

Interest Rates Have Dropped

The classic reason to refinance is when market rates drop significantly below your current rate. A common rule of thumb is refinancing when you can reduce your rate by at least 0.75% to 1%, though even smaller reductions can make sense depending on your situation.

For example, if you have a $400,000 loan at 7% and can refinance to 6%, you'll save about $263 per month and $95,000 over 30 years—even after accounting for closing costs of $8,000-12,000.

You Want to Switch Loan Types

Maybe you started with an FHA loan (with its mandatory mortgage insurance) and now have 20% equity. Refinancing to a conventional loan eliminates that insurance, potentially saving hundreds monthly.

Or perhaps you have an adjustable-rate mortgage that's about to adjust upward. Refinancing to a fixed-rate loan provides payment stability and protection from future rate increases.

Your Credit Score Has Improved

If your credit score has increased significantly since you got your original mortgage—say from 640 to 740—you may qualify for substantially better rates. Even without market rates dropping, your personal rate improvement could justify refinancing.

You Want to Change Your Loan Term

Refinancing from a 30-year to 15-year mortgage increases your monthly payment but saves enormous amounts in interest and builds equity faster. Conversely, extending from 15 years to 30 years lowers your monthly payment, freeing up cash flow for other needs or investments.

You Need to Remove a Co-Borrower

After divorce or other life changes, refinancing allows one person to remove the other from the mortgage obligation, though the person remaining must qualify for the loan independently.

When Refinancing Doesn't Make Sense

Just as important as knowing when to refinance is knowing when NOT to:

You're Close to Paying Off Your Mortgage

If you only have 5-10 years left on your mortgage, refinancing to a new 30-year loan—even at a lower rate—could cost you more in total interest. The lower rate doesn't offset the additional years of payments.

You Plan to Move Soon

Refinancing typically costs 2-5% of the loan amount in closing costs. If you're planning to sell within a few years, you may not recoup these costs through monthly savings. Calculate your break-even point before proceeding.

Your Home Value Has Decreased

If your home is worth less than you owe (underwater), or if you have very little equity, you may not qualify for refinancing—or may only qualify for limited programs like HARP or FHA Streamline refinancing.

Your Financial Situation Has Worsened

Job changes, increased debt, or credit score drops since your original mortgage may mean you no longer qualify for better rates, making refinancing pointless or even detrimental.

Calculating Your Break-Even Point

The break-even point is how long it takes for your monthly savings to offset your closing costs. Here's how to calculate it:

Break-even months = Total closing costs ÷ Monthly savings

For example:

• Closing costs: $10,000
• Monthly savings: $250
• Break-even: 40 months (3.3 years)

If you plan to stay in the home longer than your break-even period, refinancing makes financial sense. If you might move before then, it probably doesn't.

The Refinancing Process

Understanding what's involved helps you prepare:

1. Check Your Credit and Finances

Pull your credit report and score. Gather documentation of income, assets, and debts. The better your financial profile, the better your rate.

2. Shop for Rates

Get quotes from multiple lenders. Don't just stick with your current lender—they have no incentive to offer their best rate to existing customers.

3. Calculate Total Costs and Savings

Look beyond the interest rate to:

• Total closing costs and fees
• Monthly payment savings
• Total interest over the life of the loan
• Break-even timeline

4. Lock Your Rate

When you find a good rate, lock it to protect against increases during the 30-45 day processing period.

5. Complete the Application

Provide all requested documentation. Expect similar requirements to your original mortgage: pay stubs, tax returns, bank statements, etc.

6. Get an Appraisal

Most refinances require a new appraisal to verify your home's value and your equity position.

7. Review and Sign

Three days before closing, you'll receive a Closing Disclosure showing all final costs and terms. Review it carefully, then sign at closing.

Refinancing Costs to Expect

Budget for these typical expenses:

• Application fee: $0-500
• Origination fee: 0.5-1% of loan amount
• Appraisal: $400-700
• Title search and insurance: $1,000-3,000
• Credit report: $25-50
• Recording fees: $100-300
• Prepaid property taxes and insurance: Varies

Total closing costs typically range from 2-5% of the loan amount. On a $400,000 refinance, expect $8,000-20,000 in costs.

No-Closing-Cost Refinancing

Some lenders offer "no-closing-cost" refinancing, but there's no free lunch. You're either:

• Accepting a higher interest rate in exchange for lender credits that cover closing costs
• Rolling the closing costs into your loan balance

These can make sense if you don't have cash available or don't plan to keep the loan long-term, but you'll pay more in the long run.

Common Refinancing Mistakes

Avoid these pitfalls:

Resetting to a 30-Year Term Without Considering Total Cost

If you're 5 years into a 30-year mortgage and refinance to a new 30-year loan, you're extending your debt by 5 years. Consider a 25-year or shorter term instead.

Cashing Out Equity for Depreciating Assets

Using a cash-out refinance to buy cars, boats, or vacations turns appreciating home equity into depreciating consumer debt—rarely a good move.

Not Shopping Around

Your current lender has no incentive to offer their best rate. Always compare multiple lenders.

Ignoring Total Costs

A lower rate doesn't always mean a better deal if fees are excessive. Calculate total costs and long-term savings.

How CNA Equity Group Can Help

At CNA Equity Group, we analyze your complete situation to determine if refinancing makes sense for you—not just if you qualify, but if it truly benefits you financially. Our 24+ years of experience means we've seen every scenario and can provide honest guidance.

We'll help you:

• Calculate your potential savings accurately
• Determine your break-even point
• Compare offers from multiple lenders
• Understand all costs and fees
• Choose the right loan term and type
• Navigate the entire process smoothly

Ready to Explore Your Refinancing Options?

Let's analyze your situation and see if refinancing can save you money. We'll provide a clear comparison of your current loan versus refinancing options, with no pressure—just honest analysis.

Call us at (925) 244-1505 or click below to request a refinance analysis today.