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Reasons To Refinance Your Mortgage

Refinancing can offer many benefits, including funds for renovation, a lower payment or faster payoff date. But consider the pros and cons of refinancing before you act.

Lora Shinn
Contributor
Published Aug 6, 2025 in: Mortgages & Home

Read time: 9 minutes

Takeaways: Refinancing Considerations

Refinancing your mortgage can have pros and cons. Here are a few considerations:

Refinancing could lower your monthly payments, help you pay off your loan faster or provide a way for you to switch from an adjustable rate to a fixed rate loan.
Refinancing could help you tap into your home equity to pay off debt, make home improvements and make big purchases.
Refinancing could carry financial risks. Even if you qualify for a new loan, it's important to be sure your new payment fits your budget.

If you're a homeowner, your mortgage interest rate significantly affects how much money you pay for your home. Hopefully, rates were low when you signed your closing paperwork.

However, if you bought when rates were higher or have an adjustable rate mortgage, refinancing may give you an excellent opportunity to benefit from a lower, more predictable payment.

Refinancing relies on your home's equity. A cash-out refinance provides access to cash for home improvements or other expenses. In contrast, a home equity line of credit (HELOC) accesses your home's equity without refinancing your mortgage.

Will refinancing now help you save money over the length of your loan? Let's look at some aspects of refinancing and run through the pros and cons of each.

Is Refinancing Right for You?

Review whether refinancing is right for you with your financial advisor and your tax accountant.

Tips for success:

Carefully weigh upfront closing costs of refinancing.
Evaluate your timeline to determine if you'll be in the home long enough to recoup your costs.
Refinance when your home's value is greater than when you first purchased it.
Review your credit history before applying and consider waiting until your credit score improves.
Consider any impact of refinancing on your taxes.
Be ready to apply when rates decrease.
Shop around for the best interest rate and loan terms.
Refinance infrequently to reduce closing costs and fees over time.
Consider your financial situation and goals before refinancing to preserve your credit score and financial stability.

Reasons To Refinance

Consider refinancing if any of the following are true for your financial situation. In many cases, you'll want several of these "signs" on the horizon. For example, you might consider refinancing if it would lower your interest rate (and payment), you plan to use the funds for home improvements and you can quickly break even on your closing costs.

Lower Your Monthly Payment

Refinancing can lower your monthly mortgage payment (PDF) and reduce the total interest paid over time if you can get a lower mortgage interest rate. A common recommendation used to be to refinance only if the rate was 2% or more below your existing mortgage loan rate. You might still lower your payments by following that guidance, but even a small rate decrease ultimately could save you more each month if the total cost of refinancing is low.

The BECU Mortgage team suggests evaluating your break-even point: Add up the total costs of refinancing and divide by your monthly savings. If you recoup the cost in 24 months or less, it might be a good time to refinance.

Refinancing can make sense in the long term as well. For example, refinancing can help you build equity in your home faster, if you use the money you're saving to make additional mortgage payments.

Con: When you refinance, you restart your repayment clock. For example, if you are 10 years into a 30-year mortgage and refinance to another 30-year mortgage, the 30-year clock starts over.

Quickly Break Even with Closing Costs

Closing costs can include appraisal and recording fees, transfer taxes and loan origination fees, including mortgage points. On average, closing costs range from 0.5% to 3% of the new mortgage loan amount, with an average percentage of 1.06%, according to a Realtor.com survey. In Washington state, the average closing costs are $6,000 with taxes and recording, or about 1.01% of the sales or refinance price.

Ideally, you want refinancing to offer an advantage, like an interest rate that is low enough that you can quickly hit the "break-even point." That's the sweet spot when you realize savings and recover your upfront closing costs and benefit from a lower mortgage rate. You can use BECU's refinancing calculators to estimate your savings and payback period.

Additional Refinancing Calculators

Con: If you're already 20 years into loan repayment and only have 10 years left to pay off the loan balance, restarting the clock could cost you more in the long run than sticking with your current loan.

Figure out how much you'll pay upfront and whether you're in the right financial situation to pull the trigger. (Use our mortgage calculator to see what you can afford.)

Additional Mortgage Calculators

Change Your Terms: Refinance to a New Fixed Rate or Adjustable Rate Mortgage

Principal and interest payments can change a lot with an adjustable rate mortgage. Refinancing to a fixed-rate mortgage can result in more payment stability and predictability for the life of the loan. However, depending on your previous ARM rate, your new fixed payment could be higher or lower than your previous payment. Ideally, it will be lower.

Some borrowers switch from one adjustable rate mortgage to a new adjustable-rate mortgage with a lower interest rate.

Con: An ARM's fluctuating interest rate could cause future payments to go up or down. While a lower adjustable rate may seem attractive, rising rates could increase your monthly payment.

Fund Home Improvements

"Home repairs or new construction" was the second-most common reason for a cash-out refinance cited in a new 2025 CFPB report (PDF). A cash-out refinance provides access to cash for home improvements or other expenses.

With the right changes, your improvements could increase your home's long-term value, offering a good return on your refinancing costs.

Con: Cashing out your equity could increase your debt-to-income ratio and decrease your credit score. Carefully consider the costs and how soon you plan to move.

As an alternative to a cash-out refinance, you could also consider other home improvement financing options. A HELOC, for example, gives you access to your home's equity without refinancing.

Pay Off Your Mortgage Sooner

With refinancing, you're paying off your current mortgage with a new loan. If you swap your 30-year mortgage for a 15-year mortgage, you'll pay off your mortgage sooner and receive a new payoff date.

Some shorter mortgages may offer unique advantages. For example, BECU provides a 12-year no fee mortgage that limits your fees and can pay off your existing mortgage.

Con: Consider the tradeoff — a shorter loan period could substantially increase your loan payment amount every month. This means less money for other expenses.

Remove Mortgage Insurance

If you had a small down payment, you might pay mortgage insurance. Once your home equity increases to 78% of your loan (loan-to-value ratio), you can ask for private mortgage insurance to be removed.

Con: Some loans require mortgage insurance for the life of the loan. If refinancing removes the mortgage insurance requirement — such as refinancing from a loan backed by the Federal Housing Administration into a conventional mortgage — you might reduce your monthly mortgage payment.

Remove a Co-Borrower

If you bought a house with someone else on the mortgage (such as a parent, a spouse or a partner), you can refinance in your own name to remove the co-borrower.

Con: You'll need to rely on your own credit score, income and debt-to-income ratio to qualify for a new loan.

Cash Out Equity for Other Uses

According to the CFPB survey, borrowers use cash-out refinancing for a variety of expenses. But just because you have equity in your home, it doesn't always mean you should tap into it. Consider whether cashing out is good for your long-term financial health, and whether you might have other lower-cost financing options for that big purchase.

Some other common ways borrowers use cash-out refinance money include:

Debt repayment: Paying off credit cards or other debt.
Mortgage closing costs: For refinancing or a new home purchase.
Big Purchases: To buy a new vehicle, for example.
Education expenses: Tuition and supplies for college, certification programs or professional training.

Paying Off Credit Card Debt: Special Considerations

According to the CFPB report, the most common reason for using money from a cash-out refinance was to pay off other bills or debts. The CFPB's report suggests that many people refinance to pay off credit cards, auto and student loans.

Con: You take a serious risk when paying off debts with refinancing. The Federal Reserve warns that "many financial advisers caution against cash-out refinancing to pay down unsecured debt (such as credit cards) or short-term secured debt (such as car loans)."

This is because you could lose your home if you don't pay your mortgage. If you don't pay your credit card, it could hurt your credit, but you won't lose your home.

Understand the tradeoffs. You must be able to afford your new mortgage payments and any impact on your debt-to-income ratio. Cash-back refinancing can remove some of your home's equity, negatively affecting your debt-to-income ratio and overall FICO score.

In addition, if you consolidate debt without a solid plan to pay off the debt, you could rack up new debt or get trapped in a cycle of debt.

Refinancing Process and Qualification

The refinancing process can take several weeks to several months, depending on the complexity of the loan and the lender's requirements. Refinancing generally involves these steps.

Compare Options

Meet with multiple mortgage lenders or a mortgage broker to compare refinancing options for your situation.

Application: Credit Score and More

To qualify for refinancing, you must meet the lender's requirements and provide financial documentation to the loan officer. Requirements could include:

Credit score: A good credit history and score help you qualify for a lower interest rate and more favorable loan terms.
Equity requirements: Sufficient equity in your home qualifies you for refinancing.
Income: Your income and debt-to-income ratio determine your eligibility for a larger loan.
Documentation: Pay stubs, tax returns and bank statements, among other items, support your application.

Review and Close

Review the documents and sign. After closing, you'll receive funds if you use a cash-out refinance.

Frequently Asked Questions About Refinancing

Is There a Way To Avoid Paying Closing Costs Upfront?

Refinancing costs can be rolled into the new loan, but your monthly mortgage payment will likely be higher than it would've been. You may also be able to negotiate with your lender to reduce or waive some of the closing costs, but you may pay a higher interest rate.

What Should I Consider When Thinking About Home Equity?

If you're thinking about tapping the equity in your home, consider:

Number of years until your current loan ends.
Term of the new loan.
Current interest rates.
Estimated monthly payment amount.
Total cost of borrowing.
Breakeven point when you will save money.

Can Refinancing Impact My Taxes?

After you refinance, the amount you pay for mortgage interest may increase or decrease. You can deduct the interest paid on your mortgage on your tax return, which can help reduce your taxable income.

However, tax laws and regulations can change, so it's essential to consult with a tax professional to understand the tax implications of refinancing.