Home refinancing during the starting-out phase presents limited opportunities, but it carries important considerations if you’ve recently purchased a home. Most young homeowners should focus on building equity rather than extracting it through cash-out refinancing.

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However, rate-and-term refinancing—replacing your current mortgage with a lower-rate loan without taking cash out—can make sense if interest rates have dropped significantly since your purchase.

Generally, refinancing is worthwhile when you can reduce your rate by at least 0.75–1% and plan to stay in the home long enough to recoup closing costs (typically 2–6% of the loan amount).

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At this life stage, avoid the temptation of cash-out refinancing to fund lifestyle expenses, consolidate consumer debt, or make unnecessary purchases. While mortgage interest may be tax-deductible and rates lower than other borrowing options, you’re converting short-term debts into long-term obligations secured by your home.

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Young borrowers often underestimate closing costs and the impact of resetting their loan term back to 30 years from, perhaps, 27 remaining. This resets your amortization schedule, meaning more interest paid over time, even if monthly payments decrease.

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Use refinancing strategically:

• To reduce your interest rate,

• To shorten your loan term when income increases, or

• To eliminate Private Mortgage Insurance (PMI) once equity reaches 20%.

 

Additional Refinancing Resources:

• When Does It Make Sense to Refinance? — Consumer Financial Protection Bureau

• Mortgage Refinance Calculator — Bankrate

• Rate-and-Term vs. Cash-Out Refinancing — NerdWallet