How to Refinance Your Mortgage
A complete guide to mortgage refinancing — from knowing when the time is right to calculating your break-even point and navigating the full process.
What Is Refinancing?
Refinancing means replacing your existing mortgage with a new one. The new loan pays off the old loan, and you start making payments on the new mortgage with its new terms — potentially a lower rate, shorter term, different loan type, or larger balance (cash-out).
Refinancing can be a powerful financial tool, but it is not free. Closing costs for a refinance typically run 2–5% of the loan amount, which means you need to stay in the home long enough for the monthly savings to outweigh those upfront costs.
Types of Refinancing
Rate-and-Term Refinance
The most common refinance. You replace your existing loan with a new one at a lower interest rate, a shorter term, or both. Your loan balance stays roughly the same (you only roll in closing costs if you do a no-closing-cost refi). Goals include:
- Lowering your monthly payment by reducing your rate
- Paying off your loan faster by shortening the term
- Switching from an ARM to a fixed rate for payment stability
- Removing PMI by refinancing once you reach 20% equity
Cash-Out Refinance
You refinance into a loan larger than your current balance and receive the difference in cash. For example, if your home is worth $450,000, your balance is $250,000, and you want $50,000 for home improvements, you could refinance into a $300,000 loan and receive $50,000 at closing.
Most lenders allow cash-out up to 80% loan-to-value (LTV). At 80% LTV on a $450,000 home, you can have a maximum loan of $360,000 — so with a $250,000 existing balance, you could cash out up to $110,000. Cash-out loans typically carry rates 0.25–0.75% higher than rate-and-term refinances.
Streamline Refinance
Available for FHA, VA, and USDA loans. Streamline refinances require minimal documentation — typically no appraisal and limited income verification — because the loan is already government-backed. They are faster and cheaper than full refinances, with the sole purpose of lowering the rate.
When Does Refinancing Make Sense?
Refinancing makes financial sense when your monthly savings exceed the cost of the refinance within your planned stay in the home. The key calculation is the break-even point.
Use the Refinance Calculator to model your specific scenario and calculate your exact break-even point.
Rate Reduction Guidelines
While the break-even calculation is the most accurate approach, a common rule of thumb is that refinancing is worth considering when you can lower your rate by at least:
- 0.5% — Bare minimum to justify costs on a large loan
- 1.0% — Generally worthwhile for most homeowners who plan to stay
- 1.5%+ — Significant savings; refinancing is almost always worth it
The larger the loan balance, the smaller the rate reduction needed to justify refinancing, because savings are calculated on a larger principal.
Costs of Refinancing
Do not underestimate refinancing costs. Common fees include:
- Loan origination fee: 0–1% of loan amount
- Appraisal: $400–$700 (sometimes waived on streamline refis)
- Title search and insurance: $700–$1,500
- Lender fees (underwriting, processing, etc.): $500–$1,500
- Prepaid interest: Interest from closing date to end of month
- Recording fees: $50–$250 depending on state
Typical refinancing costs on a $350,000 loan
| Origination fee (0.5%) | $1,750 |
| Appraisal | $550 |
| Title and settlement | $1,200 |
| Lender fees | $900 |
| Prepaid interest (est.) | $600 |
| Recording and misc. | $200 |
| Total estimated closing costs | $5,200 |
No-Closing-Cost Refinance
Two ways to structure a no-closing-cost refi:
- Roll costs into the loan: Your closing costs are added to the loan balance. You do not pay cash upfront, but your balance is higher and you pay interest on those costs for the life of the loan.
- Lender credits (higher rate): The lender gives you a credit that covers closing costs in exchange for a slightly higher interest rate — typically 0.125–0.375% higher. You pay for the costs over time through the higher rate.
No-closing-cost refinances make sense if you plan to sell or refinance again within 3–5 years. For long-term holders, paying closing costs upfront and taking the lowest available rate will almost always cost less over time.
The Refinancing Process
Step 1 — Shop Multiple Lenders
Rate differences between lenders can be 0.25–0.5% or more on a refinance. Get quotes from at least three lenders — your current servicer, other banks, credit unions, and mortgage brokers. Compare both rate and APR (which includes fees). Multiple credit inquiries within 45 days count as one inquiry.
Step 2 — Lock Your Rate
Once you choose a lender, lock your interest rate. Rate locks typically last 30–60 days. Do not let your lock expire — if you need an extension, expect a fee (typically 0.125–0.25% of the loan amount for each 15-day extension).
Step 3 — Submit Documentation
Refinancing requires much of the same documentation as the original loan: tax returns, W-2s, pay stubs, bank statements, and proof of homeowner's insurance. If you have rental income, you will need lease agreements.
Step 4 — Appraisal
The lender orders an appraisal to verify your home's current value. For a rate-and-term refi with good LTV, some lenders can waive the appraisal (automated valuation). For cash-out refis, an appraisal is almost always required.
Step 5 — Underwriting and Closing
Underwriting typically takes 1–2 weeks. You will receive a Closing Disclosure at least 3 business days before closing. Review every line — it should match your Loan Estimate closely. At closing, you sign documents and pay any closing costs not rolled into the loan. Your new loan funds 3 business days later (for your primary residence, you have a 3-day right of rescission).
Common Refinancing Mistakes
- Resetting to a 30-year term: If you have 22 years left and refinance into a new 30-year loan, you extend your payoff date by 8 years — even if the rate is lower. Consider refinancing into a 20- or 15-year loan instead.
- Ignoring closing costs: A lower rate that takes 8 years to break even is not a good deal if you plan to move in 5 years.
- Cash-out for consumption: Using home equity to pay off credit cards can backfire — you have converted unsecured debt to secured debt (your home), and some borrowers run the cards back up.
- Not comparing APR: A lender with the lowest rate but highest fees may cost more than a lender with a slightly higher rate but lower fees.