Mortgage & Home Loans

What is Refinancing?

Refinancing means replacing your current mortgage with a new one. People do it to get a lower rate, change their loan term, switch from an ARM to a fixed rate, or tap into their home equity.

There are two types. Rate-and-term refi changes your rate or loan length without touching the principal. Cash-out refi gives you the difference between the new loan and your old balance as cash.

Refinancing means going through underwriting and paying closing costs again. Run a break-even analysis to figure out how many months of lower payments it takes to recover those costs.

Quick Facts

Refinance TypesRate-and-term and cash-out structures

Upfront Cost RangeTypically 2% to 5% of the new loan amount

Key Analysis ToolBreak-even point calculation

AppraisalsOften required to establish current home value

PRACTICAL EXAMPLE

You have a $300,000 mortgage at 7.0%. You refinance to 5.5% and save $300 a month. If closing costs are $6,000, your break-even is 20 months. Stay in the home past that point and you come out ahead.

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RELATED TERMS

Learn More Key Concepts

MortgageA loan secured by real estate that you pay back in regular installments over a set term.

Closing CostsThe fees and expenses paid at the end of a real estate transaction to finalize the mortgage and transfer property ownership.

Home EquityThe current market value of a home minus any outstanding mortgage balances or liens on the property.

LTV RatioA lending risk assessment ratio calculated by dividing the outstanding loan balance by the property's appraised value.

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