Refinancing Your Mortgage: How to Make Smart Decisions for Your Home

If you’ve bought a home in the last couple of years, you’ve probably found yourself asking, “When can I refinance?” After all, mortgage rates have been all over the place. But it’s not just about getting a lower rate, there’s a lot more to consider before jumping into a refinance.

In this post, I’ll walk you through what you need to know about refinancing, when it makes sense, and how to make sure you’re making a choice that fits your financial goals.

Context / Why It Happens

Over the last couple of years, a lot of buyers have been feeling the pressure of higher interest rates. As you settle into your home, it’s natural to wonder when—and if—refinancing could be the answer. But refinancing isn’t just about lowering your payment. It’s about understanding which type of refinance is best for you, what it will cost, and how long you plan to stay in your home.

So, let’s take a look at your options.

Rate-Term Refinance: Lower Your Rate or Adjust Your Loan Term

A rate-term refinance is a straightforward way to adjust your mortgage. You either lower your interest rate or change the length of your loan term—sometimes both.

For example, if you have a 30-year mortgage at 7.25%, you might refinance to 6.25%. That could save you hundreds of dollars a month. Or maybe you want to pay off your home quicker and switch from a 30-year loan to a 15-year loan.

This typically means higher monthly payments but huge savings over time.

Here’s something you might not think about: refinancing means you’re getting a brand-new mortgage. You’ll start your term over, so keep that in mind if you’ve already paid down a chunk of your mortgage.

Pro Tip: If you’re adjusting the loan term, make sure the new payment fits your budget. You don’t want to sacrifice short-term comfort for long-term savings.

Cash-Out Refinance: Access Your Home’s Equity

A cash-out refinance is when you borrow more than you owe on your mortgage. This allows you to take out some of the equity you’ve built in your home.

Let’s say your home is worth $400,000, and you owe $250,000. With a cash-out refinance, you could take out up to 80% of your home’s value, which would give you up to $320,000 for a new loan amount. After deducting your current mortgage balance and closing costs, you can then use that extra money for home improvements, debt consolidation, or whatever you need.

However, keep in mind that you’re increasing your loan balance, so your payments will likely go up. 

Pro Tip: Before choosing a cash-out refinance, ask yourself if you’re really using the extra money wisely. It’s easy to get excited about accessing your equity, but make sure it makes financial sense in the long run.

The Costs of Refinancing

Refinancing isn’t free. Just like when you bought your home, you’ll face closing costs, including title insurance, lender fees, and sometimes an appraisal. However, certain refinances, like an FHA streamline or VA IRRRL, may not require an appraisal.

One of the big decisions you’ll need to make is whether to pay these costs upfront or roll them into your new loan balance. 

Pro Tip: If you don’t want to pay closing costs out of pocket, rolling them into the loan might be the way to go but be aware that this will increase your mortgage balance, which means (slightly) higher payments.

Another thing to keep in mind is that when you refinance, any funds in your current escrow account for taxes and insurance will be refunded to you.

When Should You Refinance? Timing Matters

The decision to refinance should be based on a few key factors: the rate difference, your long-term plans, and how much refinancing will cost you.

Generally, refinancing makes sense if rates are 0.75% to 1% lower than your current rate. But that’s not all. You also need to consider how long you plan to stay in your home. If you’re planning to move soon, refinancing might not be worth the upfront cost. However, if you’re in your home for the long haul, it could pay off quickly.

Pro Tip: You should only refinance if the savings you’ll get on your payments outweigh the refinancing costs. If you plan to stay in your home for years, refinancing is likely a smart move.

FAQ: How do I know if refinancing is right for me?

Refinancing is right for you if you can lower your interest rate by at least 0.75% to 1% and plan to stay in your home long enough for the savings to outweigh the costs. If your situation changes and you don’t stay in the home for as long as you expected, the refinance might not pay off.

FAQ: Can I roll my closing costs into my refinance?

Yes, most people choose to roll closing costs into the new mortgage. This means you won’t have to pay them upfront, but it will increase your loan balance. Some streamlined refinances, like FHA or VA loans, don’t allow you to roll in most closing costs, so make sure you check the details.

FAQ: What is the difference between a rate-term refinance and a cash-out refinance?

A rate-term refinance allows you to adjust your interest rate or loan term, while a cash-out refinance lets you borrow more than you owe, tapping into your home’s equity. Cash-out refinancing can give you extra funds for things like home improvements or debt consolidation, but it increases your loan balance.

Wrapping Up

Refinancing is a smart option if it fits with your long-term financial goals. The key is to weigh the benefits of a lower interest rate or a shorter term against the costs of refinancing. If you’re in it for the long haul, refinancing could be a great way to lower your payments or unlock your home’s equity.

If you have questions about whether refinancing is right for you, I’m always here to help.

Rebecca Richardson, “The Mortgage Mentor,” is a nationally recognized mortgage advisor based in Charlotte, NC, lending in multiple states across the U.S. With over 20 years of experience, she helps buyers navigate home financing with confidence—whether you're buying your first home, investing, or navigating a major life transition. Rebecca is especially known for her work with veterans, real estate investors, and clients with complex financial needs. As a top-producing loan officer and sought-after educator, she’s a trusted guide for buyers and real estate professionals nationwide.