Refinancing a Mortgage: When It's Worth It and How to Do It
Refinancing replaces your mortgage with a new one, usually to get a lower rate, change your term, drop mortgage insurance or take cash out. This guide explains the types of refinance, what it costs, how to work out your break-even point, when it isn't worth it and the steps to apply.
By Pond.com editors Updated 4 min read
Quick answer
- Refinancing pays off your current mortgage with a new loan, ideally on better terms.
- Closing costs are often 2% to 5% of the loan, so work out how many months of savings it takes to cover them.
- If you'll stay in the home past that break-even point, a refinance can be worth it.
- Starting a new 30-year loan can lower your payment but add years of interest; consider a shorter term.
- FHA and VA loans have streamline refinances with less paperwork.
Refinancing means taking out a new mortgage to pay off the one you have. Done at the right time, it can save you thousands of dollars or help you pay off your home sooner. Done at the wrong time, the closing costs can wipe out the savings.
This guide is general information, not financial advice.
The national average rates on the two most common home loans, from Freddie Mac's weekly survey of lenders.
| Loan | Average rate | Week before | Change over a year |
|---|---|---|---|
| 30-year fixed Freddie Mac average Average rate: 7.32% | 7.32% | 7.40% | Up 1.13 points |
| 15-year fixed Freddie Mac average Average rate: 6.68% | 6.68% | 6.71% | Up 1.24 points |
How we chose these
These are the national averages from Freddie Mac's Primary Mortgage Market Survey for the week of October 22, 2026. They aren't offers from any lender. We update them regularly; the table hides itself if it hasn't been updated in a month.
Averages are for borrowers with strong credit and a 20% down payment, and can include points. The rate you're offered depends on your credit, down payment, loan type, location and lender, so compare at least three lenders' Loan Estimates.
For information only, not a recommendation. Rates and terms change often and may depend on where you live; check the details with the provider before you apply. Pond.com isn't paid by any provider listed here.
Reasons to refinance
- Get a lower rate and a lower monthly payment.
- Shorten your term, for example from 30 to 15 years, to pay less interest overall.
- Switch from an adjustable to a fixed rate before your ARM starts to adjust.
- Drop FHA mortgage insurance by moving to a conventional loan once you have 20% equity.
- Take cash out of your equity for renovations or to pay off high-interest debt.
- Remove a borrower, for example after a divorce.
Types of refinance
| Type | What it does | Good to know |
|---|---|---|
| Rate-and-term | Changes your rate, term or both | The most common kind |
| Cash-out | Borrows more than you owe and pays you the difference | Usually up to 80% of your home's value on a conventional loan; often a slightly higher rate |
| FHA streamline | Lowers the rate on an existing FHA loan | Little paperwork, often no appraisal; must lower your payment |
| VA IRRRL | Lowers the rate on an existing VA loan | Funding fee of 0.5%; often no appraisal |
| No-closing-cost | Costs are paid through a higher rate or added to the loan | Less cash upfront, but you still pay over time |
What it costs
A refinance has closing costs, much like your original mortgage: lender fees, an appraisal, title insurance, recording fees and prepaid interest and escrow. They're often 2% to 5% of the loan amount. See closing costs explained.
Work out your break-even point
Divide your closing costs by your monthly savings. The answer is how many months it takes to get your money back.
Example: you owe $300,000 on a 30-year loan at 7.32%, paying about $2,061 a month in principal and interest. Refinancing to 6.32% cuts that to about $1,861, a saving of about $200 a month. With $6,000 in closing costs:
$6,000 รท $200 = 30 months
If you'll stay in the home and keep the loan for more than about two and a half years, the refinance pays off. If you might move sooner, it probably doesn't.
Watch the new term
Restarting a 30-year loan lowers your payment partly by stretching it out again. If you've already paid for eight years, a new 30-year loan means paying for 38 years in total, which can cost more interest overall, even at a lower rate. Ask for quotes on a 20- or 15-year term too, or keep making your old payment amount on the new loan.
When refinancing isn't worth it
- You'll move or sell before the break-even point.
- Your credit score has dropped, so you won't get a better rate.
- You have very little equity, unless you qualify for a streamline refinance.
- Your loan has a prepayment penalty that eats up the savings. These are rare today, but check.
- You'd be using cash-out for spending, turning everyday costs into debt secured by your home.
Mortgage points
Lenders may offer a lower rate if you pay points upfront, each costing 1% of the loan. They only pay off if you keep the loan for years. See mortgage points explained.
How to refinance
- Know your numbers: your current rate, balance, monthly payment and roughly what your home is worth.
- Check your credit and fix any errors before you apply.
- Get Loan Estimates from at least three lenders, including your current lender and a credit union, on the same day if you can, since rates change daily. See how to compare mortgage offers.
- Compare the total cost and the break-even point, not just the rate.
- Lock your rate and send the documents the lender asks for.
- Appraisal and underwriting, unless your loan qualifies to skip the appraisal.
- Close. For a refinance on your main home, you usually have three business days after signing to cancel if you change your mind.
Taxes
Points paid on a refinance are usually deducted gradually over the life of the loan, not all in the first year. If you take cash out, interest on that extra amount is only deductible if you use it to buy, build or substantially improve your home.
Common questions
There's no single rule. The old advice of one full percentage point is only a starting point. What matters is how long it takes your monthly savings to cover the closing costs, and whether you'll keep the loan longer than that.
For a rate-and-term refinance of a conventional loan, often right away, though some lenders want a few months of payments first. Cash-out refinances usually require you to have owned the home for at least six months to a year, and FHA and VA streamlines have their own waiting periods.
Slightly and briefly. The lender's hard credit check and the new account can lower your score a few points. Shopping several lenders within a few weeks counts as a single inquiry for scoring, so compare offers in a short window.
Often, but your choices are narrower. Conventional lenders usually want some equity, and less than 20% means paying PMI. FHA streamline and VA IRRRL refinances generally don't need an appraisal, so they can work even if your home's value has fallen.