4 Reasons to Refinance Your Home
Low financing rates in recent years have led many people to consider refinancing their homes. But before you decide to refinance, it’s important to understand the reasons to refinance and the potential benefits you could see.
Whether you’re looking to shorten your mortgage term or save money with a lower rate, there are several reasons to consider refinancing.
What Is Refinancing?
Refinancing means replacing your current mortgage loan (or alternative mortgage such as a halal Islamic mortgage) with a new contract, usually to get better terms. Instead of continuing with your original agreement, you take out a new mortgage that pays off the old one, and then you make payments under the new terms.
People refinance to lower monthly payments, reduce total costs, or adjust how long they will be paying for their home or loan.
Step-by-Step: What Happens When You Refinance
The refinancing process is often less complicated than the homebuying process, but some of the steps are the same. Refinancing typically requires the same documentation you provided when you applied for your original mortgage. During underwriting, your mortgage lender or financier verifies your financial information and details about the property.
Here is what happens:
- Review your current contract
You look at your existing balance, rate, and remaining term to see if refinancing makes sense. - Apply again for financing
Just like your original mortgage, the financier checks your income, credit history, and the value of your home. - Home valuation
The lender may assess how much your home is worth to determine how much they are willing to lend. - Financing approval and offer
If approved, you receive your new rate, monthly payment, and contract length. - Pay off the old contract
The new financing pays off your existing mortgage in full. - Start the new payments
You now make payments under the new agreement instead of the old one.
>> Related Read – Solved: What Exactly Is Refinancing a Home?
Why Should I Refinance My Mortgage?
Homeowners typically refinance for one or more of these reasons:
- Lower rate: If interest rates have dropped since you bought your home, refinancing can reduce how much you pay overall.
- Lower monthly payments: Extending the loan term or securing a better rate can make payments more affordable.
- Shorter contract term: Some people refinance to move from a longer term (like 30 years) to a shorter one (like 15 years) to pay off the loan faster.
- Change mortgage type: Some homeowners refinance to switch from a variable rate to a fixed rate for more predictable payments, or to switch from a conventional mortgage to an alternative model such as an Islamic mortgage.
- Access home equity: In some cases, refinancing allows homeowners to access the equity they’ve built up in their home.
When Should I Refinance My Mortgage?
Refinancing can provide you with many benefits, but timing your refinancing well will affect the mileage that you get out of those benefits. If you refinance too soon, you may see limited advantages. And if you miss a window of lower rates, you could miss out on savings.
To determine when it’s the right time to refinance, you will need to consider multiple factors like mortgage rates and any changes to your credit score.
1. Refinance When Rates Are Lower
A drop of 1% can make refinancing worthwhile, and a drop of 2% or more can absolutely make refinancing a wise decision. Taking advantage of rates when they are low is a smart decision that can reduce your monthly payments.
2. Refinance When Your Credit Score Has Improved
Your credit score has a significant impact on how much you will pay over the life of your mortgage. Financiers have less confidence in buyers with lower credit scores, so they either require a larger down payment or increase your mortgage rate to make up for that increased risk.
If your credit score has improved since you bought your house, you may be able to refinance and get a lower rate because of your better score. Refinancing with a very good credit score of 740 or higher also means you may qualify for additional types of financing. You’ll have more choices and possibly be able to refinance into a new mortgage that can save you money.
3. Refinance When You Can Eliminate Mortgage Insurance
If your original mortgage required you to take out private mortgage insurance (PMI), then you are making additional monthly payments on this insurance. Refinancing could help you to eliminate your PMI, saving you money every month.
For example, mortgages insured by the Federal Housing Administration (FHA) require mortgage insurance. That insurance cannot be canceled during the mortgage term, but once you have established at least 20% equity in your home, you could eliminate the PMI by refinancing into a conventional or Islamic mortgage.
>> Related Read – The Difference Between an Islamic Mortgage and a Conventional Mortgage
When Refinancing Makes Sense (and When It Doesn’t)
Refinancing can be a smart move if you plan to stay in your home long enough to benefit from the savings. It may not be worth it if fees are high or if you are close to finishing your loan anyway.
Here are some of potential costs:
- Application or arrangement fees
- Valuation or legal costs
- Early repayment charges on an existing loan
That’s why it’s important to check whether the long-term savings outweigh the upfront costs.
4 Good Reasons to Refinance Your Home
There are many potential reasons to refinance your home. These four reasons are among some of the most popular:
1. Lock in a Lower Rate to Lower Your Monthly Payment
If you choose to refinance when rates are lower than they were when you closed on your home, you could potentially enjoy massive savings over the life of your mortgage. This is particularly true if you still have many years of payments left on your mortgage.
Here’s an example:
Let’s say Laila bought her home 5 years ago. She financed $275,000 with a 30-year contract at a rate of 4.0%, paying $1,313 per month. After 5 years, she has $250,000 left to pay. She takes advantage of a low rate to refinance at 2.87%, which reduces her monthly mortgage payment to $1,037 – saving her nearly $276 every month. Her closing costs to refinance will amount to several thousand dollars, but she will save more than $74,000 through lower monthly payments.
In this scenario, refinancing is very lucrative for Laila.
2. Refinance to Reduce Your Term from 30 to 15 Years
Refinancing to a 15-year contract when rates are low can offer some of the greatest savings over the life of your contract. A 15-year contract may be more affordable than you think because cutting the length of the contract in half does not double the payments.
Depending on the value of your mortgage contract and your old and new rates, a shorter contract might add a few hundred dollars a month to your payments, but the savings over the life of the contract can be significant.
In Laila’s situation above, let’s say she is now earning more money than she was five years ago, so she decides she can afford to pay more than her current $1,313 each month in return for a shorter contract. So she opts to refinance to a 15-year contract at the available rate of 2.50%. Her closing costs are low because she is taking advantage of a Guidance Residential promotion that waives her origination fee of $1,195. After the refinancing process, her monthly payments are now $1,667 – higher than before, but she will now be finished paying off her home in only 15 years rather than in 25 more years.
By the time her home is paid off, Laila will have saved over $147,000! She will also own her home outright much faster.
If being free from home payments is important to you, refinancing to a 15-year contract is certainly worth careful consideration, especially if you’ve ever made or considered making extra payments to pay off your home sooner.
>> Curious About Your Scenario? Use This Calculator to See How Much Money You Could Save.
3. Refinance to Access Your Home Equity
Equity is the amount of your home’s value that you have already paid off. You gradually build equity in your home with every mortgage payment, and your home’s equity is a tool that you can use to refinance out of expenses like insurance premiums. You can also potentially use that money to pay down your debts (more on this in reason number three below) or as capital for a financial venture, like a new business.
Cash-Out Refinance
is a common way to use home equity for other purposes, like paying down other debts or making a major purchase or improvement on the home. You will receive cash in exchange for refinancing into a larger mortgage with a higher principal, meaning you will gradually start to pay off your home’s equity again. For example:
If you had a $200,000 mortgage and had paid off $50,000 of your home’s value, you could borrow $20,000 to make renovations on your home. Your new mortgage principal would be $170,000.
To pursue a cash-out refinance, you will need to have your home appraised. Most home financing companies will let you withdraw only up to 80% of your home’s value. The amount that you can withdraw will depend on your credit score, the amount of equity in your home, and your debt-to-income ratio. Establishing a debt-to-income ratio of less than 50%, meaning that your monthly debts and payments amount to less than half of your monthly income, can increase your chances of getting approved.
People who have accumulated high-interest debt from credit cards and car payments may opt for a cash-out refinance to access funds to use to pay down the debt. Being able to pay off that debt sooner can money in the long run. For this strategy to be effective, people will want to focus on paying down the accounts that have the highest interest rates.
Others access equity to pay for renovations or repairs, or major expenses such as a vacation or a trip to hajj.
4. Refinance to Adjust Your Mortgage Type
Refinancing can also give you the opportunity to change your mortgage to another type of home financing product. Different types of home financing products can be appealing depending on your situation:
- An adjustable-rate mortgage (ARM) has a fixed rate for the first few years. After those initial years pass, the mortgage rate adjusts periodically, which means your payments may also change. You will lock in and have a steady mortgage rate during those first years, and your rate can decrease over time. However, your rate could also increase, meaning your payments could go up. Many homeowners with an ARM opt to refinance to a fixed-rate mortgage when they can.
- A fixed-rate mortgage, a more popular type of home financing product for buyers purchasing a home for the long term, means that you will have the same mortgage rate for the entire length of the contract or term. Your payments will be predictable and simple to understand, but if mortgage rates drop during your term, your payments won’t be reduced unless you refinance.
- An Islamic mortgage offers homeowners with conventional mortgages an equally affordable option to align your home financing product with your faith and principles. And if you already have Islamic financing and have owned your home for several years, there is a chance that refinancing may offer a substantial financial benefit. Note: Guidance Residential does not charge interest, as our Shariah-compliant home financing is not a loan and is completely free of riba, or interest. However, in an effort to keep our costs competitive with a traditional mortgage for our customers, we refer to prevailing rates when setting our prices.
>> Related Read – What Is an Islamic Mortgage? How Does It Work?
What Is an Islamic Mortgage?
An Islamic mortgage (often called halal or Shariah-compliant home finance) is a way to buy a home without charging or paying interest (riba), which is prohibited in Islamic law. Instead of lending money and earning interest, the bank and the customer structure the purchase so that profit is earned through trade, leasing, or partnership.
The goal is the same as a conventional mortgage (helping you own a home), but the mechanism is different and designed to align with Islamic ethical principles such as fairness, transparency, and shared risk.
Why Avoid Interest?
In Islam, money itself should not generate profit simply by being lent. Profit should come from real economic activity and shared responsibility. This is why Islamic mortgages are built around tangible assets (the property) and clearly agreed terms.
What Are Common Types of Islamic Mortgages?
While details vary by country and provider, most Islamic home finance falls into one of these models:
1. Murabaha (Cost-Plus Purchase)
- The bank buys the property first.
- It then sells the property to the customer at a marked-up price, agreed in advance.
- The customer pays this price in fixed installments over time.
- There is no interest; the bank’s profit is the agreed markup.
However, this doesn’t involve the principle of shared risk, which is important in Islamic finance.
2. Ijara (Lease to Own)
- The bank buys the property and leases it to the customer.
- The customer pays rent, plus an amount that gradually buys the bank’s share.
- Over time, ownership transfers fully to the customer.
This model has the drawback that homebuyer does not achieve full ownership rights until the end of the contract term.
3. Musharaka (Diminishing Partnership)
- The bank and the customer jointly buy the property.
- The customer gradually buys out the bank’s share.
- Rent is paid only on the portion the bank still owns.
- As the customer’s ownership increases, the rent decreases.
This is the preferred model among the Muslim community in the West.
Are Islamic Mortgages Only for Muslims?
No. Anyone can use an Islamic mortgage. Some people choose them for their ethical approach, transparency, or risk-sharing features, even if they are not Muslim.
Islamic mortgages provide a faith-compliant path to home ownership by replacing interest with fair, asset-based agreements. Whether through partnership, leasing, or cost-plus purchase, the focus is on clarity, shared responsibility, and ethical finance.
Is Home Refinancing Right for Me?
If you’re considering refinancing your home, you can try our refinance calculator or speak with a Guidance Residential Account Executive.
Guidance Residential’s co-ownership model of Islamic home financing remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over more than 20 years.
Learn more about Islamic finance, or get started on your homeowner’s journey today!
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today.
Originally published September 2020, updated October 2025.
