Refinancing your mortgage could save you hundreds per month or tens of thousands over the life of your loan. This guide explains when refinancing makes sense, how to get the best rates, and what costs to expect.
Refinancing Quick Facts 2025
- Current average rates: 6.5-7.5% (30-year fixed)
- Closing costs: 2-5% of loan amount
- Break-even point: Typically 2-4 years
- Credit score needed: 620+ (740+ for best rates)
- Equity required: Usually 20%+ for best terms
When Should You Refinance?
Good Reasons to Refinance
- Lower interest rate: Drop of 0.75-1%+ usually makes sense
- Shorter loan term: Move from 30-year to 15-year
- Remove PMI: If you now have 20%+ equity
- Switch loan type: ARM to fixed, or vice versa
- Cash-out equity: Home improvements, debt consolidation
- Remove co-borrower: Divorce or estate planning
When NOT to Refinance
- Moving within 2-3 years (won't break even on costs)
- Rate drop less than 0.5% (usually not worth it)
- Near end of current loan (most interest already paid)
- Credit score has dropped significantly
- Home value has decreased below loan balance
Types of Refinancing
| Type | Purpose | Best For |
|---|---|---|
| Rate-and-Term | Lower rate or change term | Reducing monthly payment |
| Cash-Out | Take equity as cash | Home improvements, debt payoff |
| Cash-In | Pay down principal to get better rate | Removing PMI, better terms |
| Streamline (FHA/VA) | Simplified refinance | Existing FHA/VA loans |
| No-Closing-Cost | Roll costs into loan | Short-term homeowners |
How Much Can You Save?
Refinance Savings Example
Current loan: $300,000 at 7.5%, 30-year fixed
New loan: $300,000 at 6.5%, 30-year fixed
| Current | New | Savings | |
|---|---|---|---|
| Monthly payment | $2,098 | $1,896 | $202/month |
| Total interest (30 yr) | $455,089 | $382,633 | $72,456 |
Closing costs: ~$6,000-9,000
Break-even: ~30-45 months
Current Mortgage Rates 2025
| Loan Type | Rate Range | APR Range |
|---|---|---|
| 30-Year Fixed | 6.5% - 7.5% | 6.6% - 7.6% |
| 15-Year Fixed | 5.75% - 6.75% | 5.9% - 6.9% |
| 5/1 ARM | 5.5% - 6.5% | 6.0% - 7.0% |
| FHA 30-Year | 6.25% - 7.25% | 6.5% - 7.5% |
| VA 30-Year | 6.0% - 7.0% | 6.2% - 7.2% |
*Rates as of January 2025. Rates change daily.
Refinancing Costs
Typical Closing Costs
- Origination fee: 0.5-1.5% of loan amount
- Appraisal: $300-700
- Title insurance: $500-1,500
- Title search: $200-400
- Recording fees: $50-250
- Credit report: $25-50
- Attorney fees: $500-1,000 (if required)
Ways to Reduce Closing Costs
- Shop multiple lenders (get 3+ quotes)
- Negotiate lender fees
- Ask about lender credits for higher rate
- Consider no-closing-cost refinance
- Close at end of month (less prepaid interest)
How to Get the Best Rate
- Check your credit score: 740+ gets best rates
- Improve credit if needed: Pay down debt, fix errors
- Calculate your equity: 20%+ avoids PMI
- Shop multiple lenders: Compare at least 3-5
- Compare APR, not just rate: APR includes all costs
- Consider points: Pay upfront for lower rate if staying long-term
- Lock your rate: Rates can change during processing
The Refinancing Process
Step-by-Step Timeline
- Week 1: Check credit, gather documents, shop lenders
- Week 2: Choose lender, submit application
- Weeks 2-3: Appraisal ordered and completed
- Weeks 3-4: Underwriting review
- Week 4-5: Clear to close, review closing disclosure
- Week 5-6: Sign closing documents
Total time: 30-45 days typically
Documents Needed
- Recent pay stubs (30 days)
- W-2s (last 2 years)
- Tax returns (last 2 years)
- Bank statements (2-3 months)
- Current mortgage statement
- Homeowners insurance policy
- ID (driver's license, passport)
Cash-Out Refinance
How Cash-Out Works
Replace your mortgage with a larger one and receive the difference in cash.
Example:
- Current mortgage: $200,000
- Home value: $350,000
- New loan (80% LTV): $280,000
- Cash received: $80,000
Good Uses for Cash-Out
- Home improvements (adds value)
- Pay off high-interest debt
- Emergency fund
- Education expenses
Poor Uses for Cash-Out
- Vacations or luxury items
- Investments (risky with home as collateral)
- Paying off debt you'll rack up again
Common Refinancing Mistakes
- Focusing only on monthly payment: Consider total cost
- Extending loan term: Restarting 30 years adds interest
- Not shopping around: Rates vary significantly by lender
- Ignoring closing costs: Factor into break-even calculation
- Waiting for "perfect" rate: Time in market matters
- Cash-out for the wrong reasons: Can lead to more debt
Refinance Calculator
Break-Even Formula
Break-even months = Closing costs ÷ Monthly savings
Example: $6,000 closing costs ÷ $200/month savings = 30 months
Rule of thumb: If you'll be in the home longer than break-even, refinancing makes financial sense.