What Is Mortgage Refinancing?
A mortgage refinance replaces your current home loan with a new one. Homeowners often refinance to lower their interest rate, reduce monthly payments, or access home equity. Some also refinance to shorten their loan term, eliminate FHA mortgage insurance, or switch from an adjustable-rate to a fixed-rate mortgage.
How Does Refinancing Work?
When you buy a home, your mortgage covers the purchase, and you repay the lender over time. Refinancing replaces your existing loan with a new mortgage that pays off the old balance. Instead of paying a seller, the new loan clears your outstanding balance. You then make payments based on the updated mortgage terms. The process mirrors a purchase mortgage, requiring an application, underwriting, and closing.
When to Refinance a Mortgage
A mortgage refinance makes sense when interest rates drop below the rate on your current loan. Lower rates reduce interest costs and monthly payments. If rates have increased since you purchased your home, a refinance may still offer benefits—such as removing FHA mortgage insurance. An improved credit score can also help you secure a better interest rate.
Top Reasons to Refinance
1. Lower Monthly Payments
A lower interest rate can reduce your monthly mortgage payment, making homeownership more affordable.
2. Pay Off Your Loan Faster
Switching from a 30-year to a 15-year mortgage reduces long-term interest costs. However, monthly payments will likely increase. Making extra payments on your current loan is another way to pay it off faster without refinancing.
3. Extend the Loan Term
Going from a 15-year to a 30-year mortgage lowers monthly payments but increases total interest paid over time.
4. Tap Into Home Equity
A cash-out refinance lets you borrow more than your current loan balance, providing cash for expenses like home improvements or debt consolidation. Depending on your credit and market rates, you may also secure a lower interest rate.
5. Remove FHA Mortgage Insurance
If your FHA loan includes mortgage insurance premiums, renegotiating your loan to a conventional loan with at least 20% equity eliminates this extra cost.
6. Switch from an Adjustable-Rate to a Fixed-Rate Mortgage
Refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate loan provides payment stability, especially when ARM rates rise.
Costs of a Refinance
The cost to refinance your mortgage is typically between 3% and 6% of your loan balance. For example, if you owe $200,000, expect fees between $6,000 and $12,000. Check your original mortgage for prepayment penalties before refinancing.
How to Find the Best Mortgage Rates
- Compare Lenders: Request Loan Estimates from at least three lenders. These documents outline loan terms, payments, and fees.
- Use a Refinance Calculator: Compare new loan terms with your current mortgage to estimate monthly savings and long-term costs.
- Calculate Your Break-Even Point: Determine how long it takes for monthly savings to offset closing costs. If refinancing costs $6,000 but saves $200 per month, the break-even point is 30 months.
Steps to Refinance Your Mortgage
1. Set Your Goal
Decide whether you want to lower payments, shorten your loan term, eliminate mortgage insurance, or access cash. This helps identify the best refinance option.
2. Apply to Multiple Lenders
Submit applications within a two-week period to limit the impact on your credit score. Credit scoring models count multiple mortgage inquiries within this timeframe as a single inquiry.
3. Choose the Best Offer
Compare Loan Estimates to find the best deal. Consider interest rates, closing costs, and lender fees.
4. Lock in Your Rate
Locking your rate prevents fluctuations before closing, providing stability during the process.
5. Finalize and Close the Loan
Once approved, pay closing costs and complete the loan process. Unlike a home purchase, no property transfer occurs.
Get Started Today!
A mortgage refinance can reduce costs, improve loan terms, and unlock home equity. However, consider the total costs and long-term savings before deciding. Use a mortgage refinance calculator or speak with a lender to explore your options.
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