With mortgage rates dipping below 6% in early 2026, millions of homeowners who locked in rates above 7% during 2023-2024 have a significant opportunity to reduce their monthly payments through refinancing.
When Does Refinancing Make Sense?
The traditional rule says refinancing is worthwhile when you can lower your rate by at least 0.5-0.75%. With closing costs typically running 2-5% of the loan amount, you need to stay in the home long enough to recoup those costs through monthly savings.
Here’s a concrete example: On a $350,000 mortgage, refinancing from 7.25% to 5.87% reduces your monthly payment from $2,388 to $2,071 — saving $317 per month or $3,804 per year. With $8,000 in closing costs, you’d break even in 25 months.
Types of Refinance Options
Rate-and-Term Refinance
The most common type, this replaces your current mortgage with a new one at a lower rate, different term, or both. Switching from a 30-year to a 15-year mortgage while rates are low builds equity faster and saves tens of thousands in total interest, though monthly payments increase.
Cash-Out Refinance
A cash-out refinance replaces your mortgage with a larger loan, giving you the difference in cash. This is useful for home improvements, debt consolidation, or major expenses. Rates are typically 0.125-0.25% higher than standard refinancing. Only consider this if the cash serves a specific financial purpose — not for discretionary spending.
Streamline Refinance
FHA, VA, and USDA borrowers may qualify for streamline refinancing with reduced documentation, no appraisal requirement, and lower closing costs. VA IRRRL (Interest Rate Reduction Refinance Loan) is particularly attractive, requiring no credit check or appraisal in most cases.
How to Get the Best Refinance Rate
Get quotes from at least 4-5 lenders within a 14-day period. Include your current lender, who may offer a retention rate to keep your business. Online lenders like Better.com and Rocket Mortgage often offer competitive rates with fast processing.
Improve your credit score before applying. Pay down credit card balances below 30% utilization, dispute any errors on your credit reports, and avoid opening new credit accounts in the 3-6 months before refinancing.
Consider paying points to buy down your rate if you plan to stay in the home long-term. One discount point (1% of loan amount) typically reduces your rate by 0.25%, paying for itself in 4-5 years of reduced payments.