Quick Definition

Refinancing means replacing an existing loan with a new one, typically to secure a lower interest rate, change the loan term, or access home equity. It involves closing costs that must be weighed against the potential savings.

How Refinancing Works

When you refinance, you take out a new loan that pays off your existing one. The new loan may have a different interest rate, term length, or both. You go through a similar process as your original mortgage: application, appraisal, underwriting, and closing.

The key question is whether the monthly savings justify the upfront closing costs. This is measured by the break-even point — the number of months it takes for your cumulative savings to exceed the closing costs.

Types of Refinancing

  • Rate-and-Term: Change the interest rate, loan term, or both without taking additional cash out
  • Cash-Out: Borrow more than you currently owe and receive the difference as cash, often for home improvements or debt consolidation
  • Streamline: Simplified refinance programs (FHA/VA) with reduced documentation and no appraisal requirement

Real-World Example

Example

You owe $280,000 at 7.0% (payment: $1,863/mo). You refinance to 5.5% with $6,000 in closing costs (new payment: $1,590/mo). Monthly savings: $273. Break-even: $6,000 ÷ $273 = 22 months. If you plan to stay in the home beyond 22 months, the refinance pays off.

Frequently Asked Questions

When should I refinance my mortgage?

Consider refinancing when rates drop at least 0.75-1% below your current rate, you plan to stay in the home past the break-even point, and your credit score qualifies you for competitive rates.

How much does refinancing cost?

Closing costs typically range from 2-5% of the loan amount. On a $300,000 loan, expect $6,000-$15,000 in fees including appraisal, title insurance, origination, and recording fees.

Does refinancing restart my loan?

Yes. Refinancing replaces your current loan with a new one, resetting the amortization schedule. If you refinance a 30-year mortgage after 10 years into a new 30-year term, you will be paying for 40 years total.