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Why Should I Refinance My Mortgage?

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If you have an existing mortgage loan, you have the option to refinance it. You do this by securing a new home loan to pay off your original mortgage. But you may be wondering, why refinance if you already have a home loan? There are a few key reasons it may make sense.

Why is it a good idea to refinance my mortgage?

It's a good idea to refinance your mortgage if doing so can help improve your finances. Refinancing could lower your interest rate. This can reduce borrowing costs. It could allow you to lower your monthly payment and so provide more flexibility. It could also make it possible to tap into home equity -- you might want to take cash out to finance home improvements, for example. Or it could help you change the terms of your current loan to one that's a better fit.

4 reasons why to refinance your mortgage

Here are four of the best reasons to refinance your home loan.

1. Reduce your interest rate

A lower interest rate means more of your monthly payment goes toward paying off what you owe. Depending on the decisions you make on your repayment timeline, a lower rate can also reduce total interest costs, get you a lower monthly payment, or do both.

Refinancing rates are low right now, so it may be possible to qualify for a new mortgage at a lower interest rate than you're currently paying. You may also be able to get a better mortgage rate if your credit has improved since you initially borrowed. It's a good idea to shop around with refinance lenders to get the best rates.

2. Change your payoff timeline

You can change your repayment schedule by refinancing.

If you have 20 years left on your mortgage, you could refinance to a 15-year loan. A shorter repayment time could raise your monthly payment -- sometimes even if you reduce your rate. But it could substantially reduce total payment costs.

You could also refinance to a loan that has a longer repayment timeline. With this strategy, you might save money on your monthly payments, even if you don't drop your rate much. But doing this could make total loan costs higher -- even if your rate is lower -- because you'd pay interest longer.

A mortgage calculator can help you understand how the payoff timeline and interest rate affect monthly costs and total costs over time.

3. Change your loan type

If you have an adjustable-rate mortgage, you may decide to refinance to a fixed-rate loan. That way, you won't have to worry about rates and payments rising in the future. Or if you have an FHA loan and are paying mortgage insurance, you may refinance to a conventional loan to eliminate mortgage insurance costs.

4. Tap into your home equity

If you have a lot of equity (ownership) in your home, you may want to use some of that money for other things. A cash-out refinance loan is one way to do that.

Here's how a cash-out refinance works: Let's say you have a mortgage for $100,000. You might refinance to a new mortgage of $150,000. Then, the lender will give you the extra $50,000 in cash. You can use this for home improvement projects, paying off credit card debt, or anything else you'd like.

This is an alternative to a home equity loan or home equity line of credit (HELOC). Cash-out refi loans can come with lower fixed interest rates than home equity loans, while HELOCs often have variable rates. And while home equity loans are tax deductible only if you use the money to buy, build, or improve your home, your refinance loan is deductible if you itemize.

Still have questions?

Here are some other questions we've answered:

How much money could be saved by refinancing?
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The Ascent's best mortgage refinance lenders

Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.


  • Refinancing your mortgage is a smart choice if you can reduce your interest rate, monthly mortgage payment, or total payoff costs. A refinance loan is an alternative to a home equity loan or line of credit if you need to tap home equity. It can have a lower interest rate than either of those options. Plus, mortgage interest is tax deductible if you itemize.

  • Here are some reasons why you might want to refinance your loan:

    • You can lower your monthly payment, usually by reducing your interest rate and sometimes by choosing a longer loan term.
    • You qualify for a new mortgage at a lower interest rate and plan to keep your new loan long enough for the savings to cover the closing costs of refinancing.
    • You want to change your loan from an adjustable-rate mortgage to a fixed-rate mortgage or other loan type.
    • You'd like to tap into your home equity to accomplish other financial goals and don't want a home equity loan or line of credit.
  • One traditional rule of thumb advises you to refinance when you can reduce your mortgage interest rate by 1%. However, this is a very simplistic approach. In general, you should refinance if doing so will save you enough money to cover the costs of refinancing in a reasonable time. If you don't expect to move or refinance again before you cover the closing costs, you can benefit by securing a mortgage refinance loan.

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