A refinance replaces your existing mortgage with a new loan. This post covers five reasons to price one and three cases where the closing costs are never recovered.
1. Rates are below your current mortgage rate
If today's rates sit below your existing rate, a refinance lowers the monthly payment. There is no fixed size of rate cut that makes a refinance worth it; use the break-even calculation in the section on when a refinance costs more than it saves.
Run your numbers: put your balance and current rate into our refinance savings calculator.
2. Your credit score has gone up
If your credit score has risen since you got your original mortgage, you may qualify for a lower rate now even if market rates have not moved. Agency pricing grids (the Fannie Mae and Freddie Mac loan-level price adjustment matrices) charge more for a score in the 660s than in the 740s at the same loan-to-value, so a higher score alone can lower the rate you are offered.
3. You want to switch loan types
Three loan-type switches a refinance can make:
- ARM to fixed rate: You have an adjustable-rate mortgage and want a fixed payment before the rate adjusts
- 30-year to 15-year: You can afford the higher payment and want to pay off the home sooner with less total interest
- FHA to conventional: FHA annual mortgage insurance runs for the life of the loan when you put down less than 10%. If your home has appreciated and you have 20%+ equity, switching to a conventional loan eliminates that cost
4. You want cash from your home equity
A cash-out refinance borrows against the equity in your home. Uses include:
- Home improvements that increase your property's value
- Consolidating high-interest debt
- Funding education
- Emergency reserves
If you bought before 2021, check your current equity: five years of principal paydown plus any rise in your home's value may put you past 20% equity.
5. You want to remove mortgage insurance
If you put down less than 20% on a conventional loan, you are paying private mortgage insurance (PMI). Once rising home value or principal paydown brings you to 20% equity, a refinance into a loan at 80% LTV or below removes the PMI.
If you have an FHA loan with less than 10% down, the only way to drop the annual premium is to refinance.
When a refinance costs more than it saves
- You plan to move soon: Refinance closing costs in DC run $3,000–$8,000, with no recordation tax on a residential refinance (D.C. Code § 42-1102(21); see our DC recordation tax page). If you move before the lower payment has covered those costs, the refinance costs more than it saves.
- You are far into your loan term: In the early years of a mortgage, most of each payment goes to interest. Late in the term, most of the interest is already paid, and a new 30-year loan starts a new amortization schedule where most of each payment is interest again.
- The break-even is too far out: Calculate your break-even point, the number of months it takes for the lower payment to cover the closing costs. If you will not keep the loan that long, skip the refinance.
Next steps
Gather your current loan balance, interest rate, and remaining term, then check today's rates against your existing rate.
Read the refinance overview or get pre-qualified. Pre-qualification takes two minutes and does not pull your credit.
