Why Refinance?
- Get a lower rate
- Reduce monthly payment
- Remove mortgage insurance
- Customize your term (+ or -)
Earn cash back
after close!
With Home Connect, you could earn $350 to $9,500 cash back after close.
Key Takeaways
- Refinancing replaces your current mortgage with a new loan that may offer different rates, terms or payment options
- Common reasons to refinance include lowering your interest rate, changing your loan term, removing mortgage insurance or accessing home equity
- Timing matters when refinancing, especially when considering interest rates, home equity, closing costs and your break-even timeline
- Refinancing may not make sense if the upfront costs outweigh the long-term savings or if you plan to move in the near future
Unless you had the resources to buy your home using cash, you probably needed a mortgage. But your needs, financial circumstances and the market at the time you closed on your home loan may have changed.
Refinancing your home gives you the opportunity to reshape your mortgage around your current goals. Depending on your situation, a refinance may help you lower your interest rate, reduce your monthly payment, adjust your loan term, remove mortgage insurance or access available home equity for other financial priorities.
Like any major financial decision, refinancing works best when the timing and numbers align with your plans. So when does refinancing make sense? Here’s a closer look at how refinancing works, when homeowners often consider refinancing and what to review before moving forward.
What Happens When You Refinance Your Home?
When you refinance, you’re essentially trading in your current loan for a new one — and then using your new loan to pay off the old one. Depending on the refinance option you choose, your new mortgage may come with a different interest rate, loan term, monthly payment or loan type. A cash-out refinance may also allow eligible borrowers to access a portion of their available home equity as cash.
Like your original mortgage, refinancing also includes closing costs and lender approval requirements.
Understanding the Reasons to Refinance Your Home
If you’re not satisfied with your current mortgage or you feel like you could do better, refinancing may be worth exploring. The following are several common reasons homeowners choose to refinance:
Capture Lower Interest Rates
One of the primary reasons homeowners refinance is to secure a lower interest rate. Mortgage rates are influenced by several factors, including market conditions, your credit profile, your loan-to-value (LTV) ratio and the type of property being financed.
Because these factors can change over time, refinancing may allow you to replace your current mortgage with a lower-rate loan. Depending on your loan balance and term, that lower rate could help reduce your monthly payment and the total amount of interest paid over the life of the loan.
Shorten Loan Term
The sooner you pay off your mortgage, the sooner you can put more of your money toward other financial goals. Without the demands of loan payments, you’ll likely find that your paycheck, savings and investments go a lot further.
Refinancing to a shorter mortgage term, such as from a 30-year to a 15-year loan, can help you pay your mortgage faster and enjoy substantial interest savings throughout the loan term. Plus, if you refinance at a lower interest rate, you may not experience a significant increase in monthly costs.
Change Your Mortgage Type
Many homeowners choose to refinance to a different mortgage type. Some of the most popular options are detailed below.
ARM to Fixed-Rate Mortgage
Adjustable-rate mortgages (ARMs) offer lower initial interest rates for a predetermined introductory period (usually 5-10 years). However, once that period ends, the rates adjust periodically based on market conditions. While ARMs might make sense for those who want to build equity faster or plan to move before the introductory term ends, many ARM holders opt to refinance to a fixed-rate mortgage. This way, they can avoid dealing with the uncertainty of variable rates and the potential of having to pay more than they can afford once the rates start to jump.
An advantage of switching to a fixed-rate loan is that it locks in interest rates for the duration of the mortgage. For example, a 30-year fixed mortgage at 6% would remain at 6% throughout the life of the loan. Compared to an ARM, fixed-rate loans offer stability and (often) lower overall costs.
Fixed-Rate Mortgage to ARM
On the other hand, If rates are trending down, or if you plan to relocate within a few years, refinancing from a fixed-rate loan to an ARM may be worth considering.
FHA Streamline Refinance
An FHA Streamline Refinance is a mortgage refinancing program the Federal Housing Administration offers to lower the interest rate and payment for current FHA loan holders. The benefits include a simplified application process, no appraisal required in many cases, lower closing costs and the possibility of not needing to verify income or employment.
FHA to Conventional Loan
Refinancing an FHA loan to a conventional loan may reduce your long-term costs by eliminating the need for mortgage insurance once you have enough equity in your home. It also offers the potential for lower interest rates and monthly payments, which could further enhance your savings.
A Pennymac Loan Expert can help you explore the different loans that could better match your needs.
Access Home Equity Funds
If you have enough equity in your home, refinancing can allow you to tap that equity and turn it into cash. A cash-out refinance allows you to replace your current loan with a new, larger mortgage, netting you the difference between the amount borrowed and what you still owe.
For example, if your home is currently valued at $300,000 and you have a mortgage balance of $200,000, your home equity is $100,000. You could then refinance into a new $250,000 loan, and take the $50,000 difference as cash. This may make sense if you want to consolidate debt, renovate your home or pay for other large expenses.
When to Refinance Your Mortgage
Refinancing is often tied to timing just as much as financial goals. Changes in mortgage rates, your home equity or your financial situation may make it a good time to take another look at your current mortgage and see whether refinancing could better support your goals.
Mortgage Rates Have Dropped
One of the most common times homeowners consider refinancing is when mortgage rates fall below the rate on their current loan. Even a modest rate reduction may help lower monthly payments or reduce the total interest paid over the life of the loan, depending on your loan term.
Financial experts often offer different benchmarks for determining when to refinance. Some recommend waiting until rates fall at least 1% below your current loan rate, while others suggest refinancing when rates drop by about 0.5%. But the truth is, there is no perfect rule of thumb for determining when to refinance your home. Instead, you’ll want to weigh all relevant variables against your current and future plans. Once you’ve run the numbers, you’ll have the insights to decide whether refinancing makes sense for you.
Your Credit Profile Has Improved
If your credit score has improved since you first purchased your home, you may want to revisit your mortgage options. A stronger credit profile may help you qualify for more competitive refinance rates and loan terms, though lenders may also review factors like your debt-to-income ratio and income history during the approval process.
You’ve Built More Home Equity
Once you reach at least 20% equity in your home, you may qualify for more refinance options and stronger loan terms.
Many conventional refinance programs offer their most competitive options to borrowers with at least 20% equity, which may help you secure a lower rate or remove mortgage insurance. If you currently have an FHA loan, reaching that equity threshold may also allow you to refinance into a conventional mortgage and eliminate FHA mortgage insurance, provided you meet lender qualification guidelines.
Depending on your qualifications, you may also be eligible for a cash-out refinance to access a portion of your available home equity.
Your Financial Priorities Have Changed
Refinancing may make sense if your financial priorities have shifted since taking out your original mortgage. Some homeowners refinance into a longer term to reduce monthly payments, while others choose a shorter term to pay off their loan faster and save on interest.
Your Break-Even Timeline Works in Your Favor
Refinancing comes with upfront costs, including closing costs and lender fees, so timing plays an important role in determining whether it makes sense financially. One way to evaluate this is to calculate your break-even point — the time it may take for your monthly savings to outweigh the upfront refinance costs.
If you plan to stay in the home long enough to benefit from those savings, refinancing may be worth exploring.
When Should You Not Refinance Your Home?
Refinancing can be a smart financial strategy, but it’s not for everyone. Run the numbers with a mortgage refinance calculator and consider the following when deciding if it’s a wise choice for you.
When the Costs Outweigh the Savings
Refinancing may not make sense if you do not plan to stay in the home long enough to recover the upfront costs through monthly savings. In many cases, borrowers aim to reach their break-even point within about two to three years. If you expect to move before then, the refinance could end up costing more than it saves.
When Your Current Mortgage Has a Prepayment Penalty
Refinancing may not be advantageous if your existing mortgage includes a prepayment penalty. These penalties, charged for paying off your loan early, can significantly increase your refinancing cost and may negate the financial benefits of securing a lower interest rate.
When the New Rate or Term Does Not Improve Your Financial Position
A lower monthly payment does not always mean refinancing will save money over time. Refinancing into a new 30-year mortgage after several years of payments could increase the total interest paid over the life of the loan. However, Pennymac offers flexible loan terms that may better align with the time remaining on your current mortgage.
Reviewing both your monthly savings and long-term borrowing costs can help determine whether the refinance aligns with your financial goals.
How to Refinance a Mortgage
While refinancing your mortgage is generally more straightforward and quicker than the initial home-buying process, it involves similar steps:
Step 1: Apply
Refinancing starts with selecting a loan type and beginning the application process. You’ll need to provide documents like pay stubs, W-2s and bank statements. Lenders assess your assets, income and credit score to approve your loan.
Step 2: Lock in Your Rate
Given that mortgage rates fluctuate, you can lock in your rate to prevent changes before closing, usually for 30 to 60 days. You might also opt to “float” your rate, accepting the current market rate at closing.
Step 3: Go Through Underwriting and Appraisal
Once your rate is locked, your lender verifies your information and orders an appraisal to confirm your home's value, which affects how much you can borrow. It’s helpful to list any property upgrades you’ve made.
Step 4: Close
The final step is reviewing your Closing Disclosure (CD), which outlines your loan terms, monthly payment and closing costs. Your lender must provide this document at least three business days before closing, giving you time to review the details, compare them to your original Loan Estimate and ask any final questions before signing.
Mortgage Refinancing FAQs
When can you refinance a mortgage?
The timing depends on your loan type, lender requirements, credit profile and available home equity. Some refinance programs also require a waiting period, often called a seasoning requirement, before you can apply for a new loan.
Is home refinancing worth it?
Refinancing may be worth exploring if it helps you lower your rate, reduce your monthly payment, change your loan term or reach other financial goals. Reviewing your break-even timeline, upfront costs and long-term savings can help determine whether refinancing makes sense for your situation.
Does refinancing restart your mortgage?
It can. Refinancing into a new 30-year loan after several years of payments may extend your repayment timeline and increase the total interest paid over time. However, Pennymac offers flexible loan terms that may allow you to choose a new mortgage term closer to the time remaining on your current loan.
Refinance With Help From Pennymac
If you’re ready to refinance or want to explore if it’s right for you, Pennymac is here to help. Learn more about refinancing or contact a Pennymac Loan Expert, who can answer your questions and provide customized guidance.
Refinancing your existing loan may result in your total finance charges being higher over the life of your loan.
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Meet Our Contributing Editors
Bradley Thompson and Afton Lambert are Contributing Editors for Pennymac’s consumer content and are exemplary leaders within the mortgage industry space. Both experts take pride in helping our customers achieve and sustain their aspirations of home.
For over 13 years, Bradley has achieved success as a high performer in various leadership roles including consumer direct sales and mortgage fulfillment positions.
With over 10 years of mortgage experience, Afton started her career as a top performing Loan Officer, before transitioning into her leadership role, where she has recruited, hired and trained Loan Officers.
