Back to Glossary
Mortgage Refinance
Refinancing replaces your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access home equity through a cash-out refinance.
How It Works
Mortgage refinancing means paying off your existing mortgage with a new one. The most common reasons are to lower your interest rate (rate-and-term refinance), shorten your loan term (e.g., 30-year to 15-year), or pull cash from your equity (cash-out refinance). Refinancing involves closing costs of 2-3% of the loan amount, so it only makes sense if the savings exceed the costs. The break-even point is when your monthly savings have recouped the closing costs. A common rule of thumb: refinancing is worth it if you can reduce your rate by at least 0.75-1% and plan to stay in the home long enough to break even (typically 2-4 years). Rate-and-term refinances have lower rates and fees than cash-out refinances.
Key Facts
Closing costs typically 2-3% of the new loan amount
Break-even point: when monthly savings exceed total closing costs
Rate-and-term: same balance, new rate/term
Cash-out: new loan is larger, you receive the difference in cash
Requires credit check, income verification, and usually an appraisal
Resets your amortization schedule (more interest in early years again)
Example
Current loan: $300,000 at 7.5%, payment $2,098. Refinance to 6.25%, closing costs $7,500. New payment: $1,847. Monthly savings: $251. Break-even: $7,500 ÷ $251 = 30 months. If you stay 5+ years, refinancing saves $7,560 after costs.
Try the Calculator
Frequently Asked Questions
Refinance when you can lower your rate by at least 0.75-1%, you plan to stay in the home long enough to break even on closing costs (typically 2-4 years), and your credit score and home value support favorable terms.
Temporarily, yes. The hard credit inquiry and new account lower your score by 5-10 points. However, if refinancing lowers your monthly payment and improves your debt ratios, your score typically recovers and may improve within a few months.