Are You Stuck With the Same Mortgage Rate Until Your Home Is Paid Off?

The quick answer? Not necessarily.

There's a reason home buyers are commonly drawn to fixed-rate loans, as opposed to adjustable-rate mortgages. With a fixed-rate loan, the interest rate you lock in when you sign your mortgage is the same rate you'll be subject to until your home is paid off. So if you take out a 30-year mortgage, you'll be guaranteed the same monthly payments for principal and interest on your loan for three decades.

That stability can be quite helpful. When you rent a home, for example, your landlord can raise the price of your rent once your lease expires. And since many tenants sign one-year leases, that means your monthly rent could climb every year.

But just because you lock in a fixed-rate mortgage doesn't actually mean you're stuck with the same interest rate on your home loan until your property is paid off. You may have an opportunity to refinance your mortgage at some point, and that could lead to a world of savings.

How refinancing works

When you refinance a loan, whether it's a mortgage, an auto loan, or another type of loan, you swap your existing loan for a new one with terms that are more favorable to you. In the context of a mortgage, that often means trading in your existing home loan for a new one with a lower interest rate attached to it.

Mortgage rates can fluctuate a lot over time. It's possible to apply for a home loan when the average 30-year mortgage rate is sitting around 4%. If, three years later, mortgage rates drop to 3%, refinancing your mortgage could pay off if it means lowering your loan's interest rate by 1 percentage point. That lower interest rate could then translate into lower monthly payments.

Your credit score could also change for the better over time, thereby making you eligible for a lower interest rate on your mortgage. Say you had okay credit when you applied for your mortgage initially, but your score wasn't great. At that point, you may have gotten a 5% interest rate on your loan. If you manage to raise your credit score by 100 points, you might then be eligible for an interest rate of 4%, which could lead to big savings.

How to know if refinancing makes sense

Refinancing can be worthwhile if it will result in a much lower interest rate on your mortgage -- such as if your personal credit picture has improved or rates are just lower in general. Ultimately, to see if it pays off, you'll need to figure out how much savings you stand to reap after accounting for closing costs, which are the various fees you'll be charged to refinance.

Say you're charged $5,000 in closing costs to refinance but that results in a new interest rate on your mortgage that lowers your monthly payments by $250. That means after 20 months, you'll start reaping savings. If you plan to stay in your home much longer than 20 months, then refinancing could be a smart move.

The fact that mortgages let you lock in the same interest rate for many years is a good thing. But you should also know that you're not stuck with a less favorable rate if there's a better offer to be had. You can always look into refinancing and potentially slash your loan's interest rate -- even if you've already been paying off your home for years.