Can you refinance a fixed-rate mortgage?

Any mortgage can be refinanced — be it a fixed-rate one or one with an adjustable rate that changes over time.

With a refinance, you replace your existing mortgage loan with a new one. The new loan comes with new terms and a new interest rate, which could be fixed or adjustable, depending on your goals, budget, and the options your lender provides you.

Are you thinking about refinancing your fixed-rate mortgage? It’s not the right move for everyone. Here’s what to know before you pursue a refinance.

You lose your rate

A fixed-rate mortgage has a set interest rate for that loan’s entire term. If you replace that loan with a new one, though — as you do in any refinance — you forfeit that old rate, getting a new one instead. 

Your new rate will reflect current market conditions, as well as your credit score, income, and debts at the time of application, and it could be higher or lower than the rate on your current loan. 

For instance, if you took out your current fixed-rate mortgage in 2021, you might have an interest rate of 3% or less. If you refinanced today, even to a new fixed-rate loan, you’d likely get a much higher interest rate. According to Freddie Mac, the average rate on fixed-rate, 30-year mortgages is right around 7%, which would be around 4% higher than your current rate set from 2021.

Refinance penalty

When you refinance your mortgage loan, you pass off your existing loan and take away years of potential interest earnings from your lender. Because of this, some mortgage companies charge prepayment penalties for refinancing too early into the loan term. These range from a few months of interest or a percentage of the outstanding loan balance to hefty flat fees.

Fortunately, prepayment penalties were much more common prior to the housing crash of the late 2000s, but some mortgages still have them today. If you’re considering refinancing, check your mortgage paperwork and verify any potential prepayment penalties with your lender before proceeding.

Variable vs. fixed-rate mortgage

When you refinance your mortgage, you can usually choose between a variable-rate and a fixed-rate loan. As the name suggests, a fixed-rate loan gives you a consistent interest rate and monthly payment for your entire loan term (unless you refinance or sell the house before it’s paid off). 

A variable-rate loan, also called an adjustable-rate mortgage or ARM, has an interest rate that’s set for the first few years of the loan. After that point, your rate gets adjusted based on market conditions, which could raise or lower your payment along with it.

Most U.S. homebuyers choose fixed-rate mortgages since they offer more stability and are easier to budget for. Adjustable-rate mortgages can be a better fit if you only plan to be in the home for a short time and move or refinance before your rate can adjust.

How soon can you refinance a fixed-rate mortgage?

In today’s high-rate market, many homebuyers start eyeing future refinances before they even close on their home. But while refinancing could help you take advantage of lower rates once they come around, you may have to wait a bit until you can pull the trigger.

It usually depends on your mortgage type and your lender. In some cases, you may be able to refinance right away. In others, you may need to wait anywhere from six to twelve months to do it. These are called “seasoning periods,” so make sure to ask your lender when you’re allowed to refinance.

When is a good time to refinance?

Timing your refinance takes careful consideration of both market conditions and your goals as a homeowner. For example, if you need to lower your monthly payment, waiting until mortgage rates drop below your current rate or refinancing into a new 30-year loan a few years later can help you do it. 

You might also want to refinance into a fixed-rate loan if you know the adjustment period on your variable-rate mortgage is coming up (though few homeowners refinance for this reason alone). 

When gauging whether or not to refinance your mortgage, consider your breakeven point too. This is when the savings you net from the refinance start to exceed the new loan’s closing costs.

For example, if your refinance would cost you $5,000 in closing costs but save you $50 per month, you’d break even on those costs in 100 months — or over eight years into the new loan. If you don’t think you’ll stay in the home long enough to reach that point, refinancing is likely not worth it. 

Refinancing a fixed- vs. adjustable-rate mortgage

Not sure if you should refinance your loan into a new fixed-rate mortgage or an adjustable-rate loan? It depends on your goals. See below for which loan type is recommended in your scenario.

If you prefer stability  

If you want a rate and payment that are consistent for the long haul, then a fixed-rate mortgage is your answer. With these, your rate is guaranteed for the entire time you have the loan. So if you take out a 30-year, fixed-rate mortgage, your rate in Year 1 will be the exact same in Year 30 — no matter what.

If mortgage rates are going down

If mortgage rates are moving downward, you could technically choose either option. A fixed-rate loan will help you lock in that lower mortgage rate for the long term—up to 30 years. An adjustable-rate loan may offer even lower rates up front, but those rates could rise just a few years into the loan. If you don’t plan to stick around long, this could be the better option, but if you want to be in your house for the foreseeable future, an adjustable rate is likely not the safest choice.

If you have a shorter loan term

Shorter loan terms come with higher monthly payments since you spread your loan balance out over fewer months. If this gets to be too much of a strain on your budget, you can refinance into a longer-term mortgage — say from a 15-year into a 30-year one, which will lower your monthly payment and give you more time to pay off the loan.

An adjustable- or fixed-rate mortgage would both work for this goal. Though, again, one offers you more long-term stability, so you need to consider how long you plan to stay in the home before you choose.

If you plan to live in the home for a while 

Fixed-rate mortgages are best for long-term homeowners, as they give you a stable rate and payment you can rely on for decades. There are no surprises, and you also know how much to budget for each month — even years later.

Adjustable-rate loans aren’t a good idea for long-haulers, as they become unpredictable once your rate starts to adjust. Your rate and monthly payment can change quickly, putting a strain on your budget and making it hard to stay current on your mortgage.