Refinancing means replacing your existing mortgage with a new one—typically to get a lower interest rate, change your loan term, switch from an adjustable to fixed rate, or tap into home equity. It's essentially going through the mortgage process again, with similar documentation, underwriting, and closing costs. Whether refinancing makes sense depends on the numbers: will the benefits outweigh the costs over your expected ownership period?
Reasons to Refinance
Lower interest rate is the most common motivation. If rates have dropped since you bought or your credit has improved significantly, refinancing to a lower rate reduces your monthly payment and total interest paid. A general rule: refinancing makes sense if you can reduce your rate by at least 0.5-0.75% and you'll keep the loan long enough to recoup closing costs.
Shorten your loan term to pay off your mortgage faster and save on interest. Refinancing from a 30-year to a 15-year mortgage typically comes with a lower interest rate (15-year rates are usually lower than 30-year), and you'll pay far less total interest—though your monthly payment increases.
Switch from ARM to fixed if you have an adjustable-rate mortgage approaching its adjustment period and want payment certainty. Converting to a fixed rate eliminates the risk of rising payments, especially valuable if rates are currently favorable.
Cash-out refinance lets you tap home equity by taking a new loan larger than your current balance and receiving the difference as cash. This can fund home improvements, debt consolidation, or other major expenses. The trade-off is a larger mortgage balance and potentially longer payoff timeline.
Remove PMI if your home has appreciated or you've paid down principal enough to reach 20% equity. Refinancing into a conventional loan without PMI can significantly reduce monthly costs—though refinancing has its own costs to consider.
The Break-Even Calculation
Refinancing involves closing costs—typically 2-5% of the loan amount. These costs must be offset by savings for refinancing to make sense. The break-even point is when cumulative savings equal the refinancing costs.
Example: Refinancing a $300,000 loan costs $6,000 in closing costs and reduces your payment by $150 per month. Break-even: $6,000 ÷ $150 = 40 months. If you'll keep the home and loan more than 40 months, refinancing pays off. If you might sell or refinance again before then, you'll lose money.
Some lenders offer "no-closing-cost" refinances where fees are rolled into the loan balance or exchanged for a higher interest rate. These can make sense for shorter time horizons, but you're still paying the costs—just in a different form.
The Refinancing Process
Refinancing follows a similar process to getting your original mortgage. You'll complete an application, provide income documentation (pay stubs, tax returns, W-2s), and have your credit pulled. The lender will order an appraisal to determine your home's current value.
Shop multiple lenders—rate and fee differences can be significant. Get Loan Estimates from at least three lenders and compare total costs, not just rates. Online lenders, banks, credit unions, and mortgage brokers all offer refinancing.
The process typically takes 30-45 days from application to closing. You'll sign new loan documents at closing, similar to your original purchase. The new lender pays off your old loan and your new mortgage begins.