Refinancing your mortgage
A refinance replaces your loan with a new one, at new terms and new closing costs. Whether it is worth doing comes down to one number.
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Two paths. One decision.
Keep current loan
Stay put
Keep your rate and current loan terms.
Explore refinance
Make a change
Lower payment, shorten term, or tap your equity.
Refinancing at a glance
The arithmetic
Three variables decide it
A refinance replaces your current mortgage with a new one. You are not adjusting the old loan. You are paying it off and starting again, with new terms and new closing costs.
That last part is why the maths matters. A lower rate only helps if you stay long enough to earn back what the refinance cost you.
The arithmetic
Working out your break-even
Break-even is the point where the savings from your new loan equal the total costs of refinancing. After that point, the savings are yours.
Cumulative impact ($)
Break-even point
Savings grow over time
Time
Working out your break-even
The only number that decides it
- Step 11Add up costsFees and escrow
- Step 22Find monthly savingNew payment vs old
- Step 33Divide one by the otherMonths to break even
- Step 44Compare to your stayLonger means it works
If you plan to move before the break-even month, refinancing costs you money.
Two kinds
Rate-and-term, or cash-out
They sound similar and they are underwritten very differently.
| Rate-and-term | Cash-out | |
|---|---|---|
| What changes | Your rate, your term, or both | Your balance goes up and you take the difference |
| Money at closing | None to you | The cash you pulled out |
| Equity needed | Less | Often around 20% left afterwards |
| Rate | Usually the lower of the two | Usually higher |
| Used for | Cutting the rate, or dropping mortgage insurance | Renovations, or clearing higher-rate debt |
Scroll sideways to see all columns.
The maths
Work out your break-even
This is the only number that decides whether a refinance is worth doing.
About 3.8 years. Stay longer than that and you are ahead.
Principal and interest only, on a 30-year term. Resetting to a fresh 30 years lowers the payment but can raise total interest even at a better rate. Taxes, insurance and mortgage insurance are excluded.
Honestly
When refinancing makes sense, and when it does not
Worth looking at
- Rates have dropped meaningfully since you closed
- Your credit has improved since the original loan
- You are on FHA and have enough equity to shed the insurance
- You want to move off an adjustable rate before it adjusts
- You plan to stay well past your break-even point
Probably not
- You may move before you earn back the closing costs
- The saving is small and you would restart a 30-year term
- You are far into your current loan and mostly paying principal now
- Your credit or income has weakened since you closed
- You would be borrowing against your home to cover short-term spending
Check what you would qualify for
Verified numbers, without starting a full application or touching your credit.
What to expect
How a refinance runs
Application and credit check
Unlike a purchase pre-approval, a refinance involves a hard credit inquiry from the start. Expect a small, temporary dip.
Appraisal
Your home is valued to confirm your equity. A low appraisal can reduce how much you can borrow or stop a cash-out entirely.
Underwriting
Income, assets and debts are reviewed as they would be on a purchase. Documents are required here.
Signing and rescission
On a primary residence you usually get three business days to cancel after signing. The old loan is paid off after that window closes.
Before you start
Three things that change the maths
A refinance is arithmetic, not a decision. Three variables move the answer more than anything else.
How long you will stay
Every refinance has a break-even month where the saving finally covers the cost. Move before it and you lose money, however good the rate looked.
Whether you restart the clock
Dropping from a 30-year loan you have paid for six years back onto a new 30-year term lowers the payment but adds six years of interest.
What the costs actually are
Lender fees, title, appraisal and escrow set-up all belong in the calculation. A no-closing-cost refinance is not free; the cost sits in the rate.
Questions
Common questions
When is refinancing worth it?
When your monthly saving pays back the closing costs faster than you plan to stay. Divide the costs by the saving to get your break-even in months. Moving before that point means you lose money.
What is the difference between rate-and-term and cash-out?
Rate-and-term changes your rate, your term or both, and your balance stays about the same. Cash-out increases your balance and gives you the difference in cash, which usually means a higher rate and stricter requirements.
How much equity do I need to refinance?
Often around 20 percent for a conventional cash-out, and less for rate-and-term. Some government programs allow refinancing with very little equity, and streamline options exist for existing FHA and VA loans.
Does refinancing hurt your credit score?
There is a hard inquiry and a new account on your report, so expect a small dip that recovers. Rate shopping within a short window is usually treated as one inquiry.
What does refinancing cost?
Typically 2 to 5 percent of the loan amount, covering lender fees, title, appraisal and prepaid items. Some lenders offer a no-closing-cost option that raises your rate instead.
Can I refinance to drop mortgage insurance?
Yes, and it is the standard exit from an FHA loan. Once you have enough equity and the credit to qualify, refinancing into a conventional loan ends the insurance.
Keep reading
Related guides
Loan programs
Conventional, FHA, VA, USDA and jumbo compared.
How to qualify
Credit, income, debt-to-income and equity explained.
Mortgage pre-approval
How verified qualification works.
Independent sources
- Consumer Financial Protection Bureau — when refinancing makes sense
See what you would qualify for
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