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When can you refinance a mortgage?

When you refinance, you're replacing your original loan with a new one. Refinancing may allow you to adjust the interest rate and/or length of your loan, which impacts your payments. There are a number of reasons why refinancing may be a good idea, although there are a few things you should consider when deciding if refinancing is right for you.

Reasons to refinance

There are a number of reasons why you might want to consider refinancing your mortgage. Some of the primary reasons are:

1. Reduce interest rates

Perhaps the most common reason for refinancing is to lower your interest rate. This happens when current mortgage rates are lower than your original rate. When you refinance, you're replacing your original mortgage with a new mortgage that has a lower rate.

2. Shorten loan terms

When interest rates are lower, you may be able to refinance your loan for a shorter term without seeing much of a change in your monthly payment.

Even if your payments are higher, you may see significant savings over the life of your loan by making fewer interest payments. For example, you may decide to refinance a 30-year loan into a 15-year loan. While it has higher monthly payments, you'll pay l loan down faster and pay less in interest.

3. Change your loan type

In some cases, you may want to refinance to convert to a fixed- or adjustable-rate mortgage (ARM). For example, ARMs usually start out with a lower rate than a fixed-rate mortgage and, through periodic adjustments, can leave you with a rate that's higher. In this situation, it may make sense to change to a fixed-rate mortgage that would protect you against future interest rate increases.

There are also situations where it might make sense to change to an ARM. For example, if interest rates are falling, the periodic rate adjustments can result in reduced rates and smaller mortgage payments. This might be something to consider if you plan on staying in your home for a term less than the initial ARM adjustment period.

4. Take cash out to consolidate higher-interest debt or pay for large purchases

With a cash-out refinance, you may be able to consolidate higher-interest debt using the equity in your home. You could also use this equity toward larger expenses such as home improvement projects and college expenses. Remember that cash-out refinancing also increases your overall level of mortgage debt,

5. Lower monthly payments

Whether you're lowering your interest rate or extending your loan term, your new loan balance will likely result in lower monthly payments. This may leave more money available for other monthly expenses or to put towards savings.

When to refinance

So, when does it make sense to refinance? Typically, one or more of the following conditions should be present for a refinance to make sense:

Falling interest rates

When interest rates are going down it can be a good time to refinance. You can either keep your current loan term and lower your monthly payments, or you can keep your monthly payments around the same amount and shorten the length of your loan.

Available equity

If you have enough equity in your home, you can use it to consolidate higher-interest debt or put it toward larger expenses

You're in the early years of your mortgage

Refinancing typically makes the most sense when you're in the early years of your mortgage since your payments are primarily going towards your interest. Any reductions you can make towards the interest on your mortgage could benefit you financially.

What you need to refinance

In general, the refinancing process is very similar to your original mortgage process. Your lender will review your credit history, your current mortgage payment record and additional financial information. These factors will determine if you are eligible for a new mortgage

You may need to provide some information, examples may include:

  • Income: Pay stubs, tax returns and W-2s
  • Assets: Bank and security account statements
  • Debt: Monthly payment amounts and current balances for car loans, student loans, credit cards, current mortgage or home equity line of credit

In most cases, your home needs to be appraised in order to close on your refinance.

Should I refinance?

Whether or not you should refinance depends on your specific circumstances. Refinancing at the right time can help you to save money, either by lowering your mortgage payments or by reducing the amount of interest you'll pay over the life of your loan. But remember, there are costs to consider, too.

Cash-out refinancing can also help you consolidate higher-interest debt or cover the cost of major expenses, like a wedding or a home improvement project. However, you'll still have debt. Make sure you've considered all options available.

Refinancing is a big step for any homeowner. For help understanding how it all works, speak to one our home lending advisors.

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