Mortgage refinancing works by using a new home loan to pay off your existing mortgage. Once the refinance is complete, you make payments based on the interest rate, loan term and other conditions of the new mortgage.
You might refinance to reduce your interest rate, change your monthly payment, pay off your mortgage sooner, switch loan types or access home equity. Because a refinance is a new mortgage transaction, you generally need to apply and qualify based on your current finances, property and selected loan program.
Mortgage Refinancing Basics
| Refinance Feature |
How It Works |
| Existing mortgage |
Money from the new loan is used to pay off your current mortgage. |
| New mortgage |
You receive a new loan amount, interest rate, repayment term and monthly payment. |
| Qualification |
The lender reviews your finances, credit, property and applicable loan-program requirements. |
| Home equity |
Your property value and existing mortgage balances affect your available refinance options. |
| Closing costs |
You may pay lender, appraisal, title, government and settlement charges, along with prepaid expenses. |
| Closing |
You sign the new loan documents, the existing mortgage is paid off and the new mortgage becomes active. |
What Is Mortgage Refinancing?
Mortgage refinancing is the process of replacing an existing home loan with a new mortgage. The new loan pays off the current balance, and you begin making payments on the replacement mortgage.
The refinance may be completed through your current lender or a different lender. Staying with your current lender does not automatically make the transaction less expensive, so compare the interest rate, annual percentage rate, lender credits, closing costs and loan terms available to you.
What Changes When You Refinance?
Depending on the new mortgage, refinancing can change your:
- Interest rate
- Monthly principal and interest payment
- Remaining repayment period
- Fixed or adjustable rate structure
- Principal balance
- Mortgage insurance requirements
- Loan program
- Borrowers responsible for the debt
- Escrow account
Your property taxes and homeowners insurance premiums do not become permanently fixed when you refinance. Those expenses can still change after closing and affect your total monthly mortgage payment.
A lower monthly payment also does not guarantee lower total borrowing costs. Restarting with a longer loan term can reduce the required payment while extending the period during which you pay interest.
What Happens to Your Old Mortgage?
The refinance closing agent uses money from the new loan to pay the amount due on your existing mortgage. After the payoff is processed, the prior mortgage lien is released through the applicable recording process.
You then begin making payments on the new mortgage. Your first payment date and payment instructions should appear in your closing documents.
What Are the Main Types of Mortgage Refinance?
Most refinances fall into two broad categories: rate-and-term refinances and cash-out refinances. FHA- and VA-backed mortgages also have streamline refinance programs with their own eligibility rules.
Rate-and-Term Refinance
A rate-and-term refinance changes the interest rate, repayment term or other features of your mortgage without using the loan primarily to take cash out of your home equity.
You might use one to:
- Reduce your mortgage rate
- Lower your monthly principal and interest payment
- Shorten or extend the repayment term
- Switch from an adjustable-rate mortgage to a fixed-rate mortgage
- Change from one loan program to another
- Remove mortgage insurance when eligible
Conventional loan guidelines may classify this transaction as a limited cash-out refinance. Limited incidental cash back may still be permitted under the applicable program rules, so the classification does not always mean the borrower receives exactly $0 at closing.
The new rate, term and loan structure determine how a rate-and-term refinance changes your mortgage.
Cash-Out Refinance
A cash-out refinance replaces your current mortgage with a larger loan and gives you part of the difference in cash. The amount available depends on your home value, current mortgage balance, other property liens and the loan program’s maximum loan-to-value ratio.
For example, suppose your home is worth $350,000 and you owe $200,000 on your mortgage. A new loan of $240,000 could pay off the $200,000 balance and leave part of the remaining amount available for closing costs and cash proceeds. The exact amount would depend on the final payoff, transaction expenses and program limits.
A cash-out refinance increases the debt secured by your home and reduces your remaining equity. It may also replace the interest rate on your entire first-mortgage balance, not only the additional amount you want to borrow.
You can use our cash-out refinance calculator to estimate how much equity you may be able to access.
FHA Streamline Refinance
An FHA streamline refinance is available for an existing FHA-insured mortgage. According to the U.S. Department of Housing and Urban Development, streamline refinances require limited borrower credit documentation and underwriting compared with a fully underwritten FHA refinance.
The FHA offers credit-qualifying and non-credit-qualifying streamline options. “Streamline” refers to the underwriting and documentation process. It does not mean there are no eligibility requirements, closing costs or program charges.
VA Interest Rate Reduction Refinance Loan
A VA Interest Rate Reduction Refinance Loan, commonly called a VA IRRRL or VA streamline refinance, is designed for an existing VA-backed mortgage.
The U.S. Department of Veterans Affairs describes the IRRRL as an option that can reduce monthly mortgage payments or make payments more stable. Eligible closing costs may be included in the new loan, although financing those costs increases the balance on which interest is charged.
Cash-In Refinance
With a cash-in refinance, you contribute money at closing to reduce the balance of the new mortgage. This can help you reach a required equity level, lower the new loan amount, improve available loan pricing or remove mortgage insurance when eligible.
Putting more money into the property reduces your liquid savings, so consider how much cash you need to retain for emergencies and other expenses.
How Does the Mortgage Refinance Process Work?
The refinance process resembles the mortgage process used to buy a home, but the new loan pays off an existing mortgage instead of funding a purchase.
1. Set a Clear Refinance Goal
Start by deciding what you want the new mortgage to accomplish. A refinance designed to lower the monthly payment may look different from one intended to reduce total interest or access home equity.
Common goals include:
- Reducing the interest rate
- Lowering the required payment
- Paying off the mortgage sooner
- Converting an adjustable rate to a fixed rate
- Removing mortgage insurance
- Taking cash out of the property
- Adding or removing a borrower
2. Review Your Current Mortgage
Gather the information needed to compare your current loan with a potential refinance:
- Current principal balance
- Interest rate
- Remaining loan term
- Monthly principal and interest payment
- Mortgage insurance payment
- Estimated home value
- Existing second mortgages or home equity lines of credit
- Any prepayment penalty
Your monthly mortgage statement contains much of this information. A formal payoff statement will include the amount required to satisfy the mortgage by a specified date, which can differ from the principal balance shown on your statement.
3. Apply for the New Mortgage
A refinance application generally asks for information about your income, employment, assets, debts, credit history and property.
You may need to provide pay stubs, tax forms, bank statements, identification, homeowners insurance information and your current mortgage statement. Self-employed borrowers and borrowers with less conventional income may need additional records.
Document requirements vary by loan program, financial profile and underwriting method. Streamline refinance programs may use a reduced documentation process when you meet their requirements.
4. Compare the Loan Estimate
For covered mortgage transactions, the lender provides a Loan Estimate showing the proposed interest rate, monthly payment, closing costs, cash to close and other loan features.
Use the Loan Estimate to compare:
- Loan amount
- Interest rate
- Annual percentage rate
- Monthly principal and interest
- Mortgage insurance
- Origination charges
- Discount points or lender credits
- Estimated cash to close
- Prepayment penalties or balloon payments
The annual percentage rate reflects the interest rate and certain loan costs as an annualized percentage, which can make it useful when comparing offers with similar terms. It does not replace a full review of the loan balance, term, payment and cash required at closing.
5. Complete the Property Valuation
The lender must determine the property’s value for many refinance transactions. This may involve a traditional appraisal, an alternative valuation method or an appraisal waiver.
The value is used to calculate your loan-to-value ratio, which compares the mortgage amount with the property value. This ratio can affect eligibility, interest-rate pricing, mortgage insurance and the amount of equity available through a cash-out refinance.
Not every refinance requires a full appraisal. The property-review process depends on the loan program, transaction type, property and underwriting findings.
6. Go Through Underwriting
During underwriting, the lender evaluates whether you and the property meet the requirements for the new mortgage.
The review can include:
- Income and employment
- Credit history
- Assets and funds needed at closing
- Monthly debts
- Debt-to-income ratio
- Property value and condition
- Title and existing liens
- Homeowners insurance
- Program-specific eligibility
The underwriter may request explanations or updated documents before issuing final approval. Responding promptly can help prevent avoidable delays.
7. Satisfy the Final Loan Conditions
Before closing, you may need to provide an updated bank statement, proof of insurance, a letter explaining a credit inquiry, title documentation or other information needed to complete the file.
The lender may also verify your employment and confirm that your financial circumstances have not materially changed before closing.
8. Review the Closing Disclosure
The Consumer Financial Protection Bureau explains that the Closing Disclosure contains the final loan terms, projected payments and closing costs. For covered transactions, you must receive it at least three business days before consummation.
Compare the Closing Disclosure with your most recent Loan Estimate. Pay particular attention to the:
- Final loan amount
- Interest rate
- Monthly payment
- Closing costs
- Lender credits
- Mortgage payoffs
- Cash to or from the borrower
- Adjustable-rate terms, when applicable
Ask about any change or charge you do not understand before signing the final documents.
9. Sign the Refinance Documents
At closing, you sign the promissory note, mortgage or deed of trust, Closing Disclosure and other required documents. The note describes your repayment obligation. The mortgage or deed of trust creates the lender’s security interest in the property.
Depending on the transaction, you may also sign escrow documents, affidavits and a notice explaining your right to cancel.
10. The New Loan Pays Off the Old Loan
After the applicable closing and cancellation periods, the settlement agent disburses the funds. Your existing mortgage is paid off, permitted fees and costs are paid, and any eligible cash-out proceeds are distributed.
Your first payment on the new mortgage may be due more than one calendar month after closing, but that does not mean the refinance provides a free month. Prepaid interest, payoff timing and the new payment schedule account for the period between the two loans.
What Do You Need to Qualify for a Refinance?
Refinance requirements depend on the loan program, transaction type, property and lender. A standard refinance generally requires a review of your credit, income, debts and home equity.
Credit
Your credit history and credit scores can affect eligibility and pricing. There is no single minimum credit score that applies to every refinance. Government-backed loans, conventional loans and lender-specific programs follow different standards.
Income and Employment
You generally need enough qualifying income to support the new mortgage payment and your other debts. The lender may verify your employment, salary, self-employment income, retirement income or other eligible income sources.
Some streamline programs use reduced income and employment documentation, but only for borrowers and loans that meet the program’s requirements.
Debt-to-Income Ratio
Your debt-to-income ratio compares qualifying monthly debt payments with gross monthly income. The lender uses this calculation to evaluate whether your income can support the proposed mortgage and other obligations.
Acceptable ratios vary by program, underwriting findings and the overall loan file. A single ratio should not be treated as a universal refinance limit.
Home Equity and Loan-to-Value Ratio
Your equity is the portion of the property value that is not secured by mortgage debt. More equity can expand your refinance options, while limited equity can restrict available loan programs or require mortgage insurance.
Cash-out refinances generally have lower maximum loan-to-value limits than some rate-and-term refinances because you are increasing the debt secured by the property.
Mortgage Payment History and Seasoning
Some refinance programs require a specific mortgage payment history or a minimum amount of time between the original loan and the refinance. These requirements are commonly called seasoning rules.
The applicable period depends on the loan program and refinance type. Confirm the current rules for the specific mortgage rather than relying on one general timeline.
How Much Does It Cost to Refinance a Mortgage?
Refinancing can involve many of the same expenses as a purchase mortgage. Your actual costs depend on the lender, loan amount, property, location, title requirements and loan program.
Common Refinance Closing Costs
Potential charges include:
- Loan origination or lender charges
- Discount points
- Appraisal or property valuation fee
- Credit report fee
- Title search and title insurance
- Settlement or closing services
- Recording and government charges
- Flood determination or certification fees
- Program-specific mortgage insurance or funding fees
Your cash to close may also include prepaid interest and money used to establish a new escrow account for property taxes and homeowners insurance. These amounts affect the money required at closing, although they differ from lender and third-party fees charged to complete the loan.
If your previous escrow account contains money after the old mortgage is paid off, the former servicer generally handles that balance separately. Do not assume the old escrow funds will be immediately available to cover the new escrow deposit.
Can You Add Refinance Costs to the Loan?
Some loan programs allow eligible closing costs to be included in the new mortgage, subject to equity, loan limits and program rules.
Financing the costs reduces the amount you must pay upfront, but it increases the mortgage balance. You then pay interest on the financed amount over the loan term.
What Is a No-Closing-Cost Refinance?
A no-closing-cost refinance does not make the transaction expenses disappear. The costs are generally handled by adding eligible charges to the loan balance or using a lender credit to offset upfront charges.
A lender credit can be tied to a higher interest rate than you would receive without the credit. Compare the upfront savings with the larger payment and potential long-term interest before choosing this structure.
What Is the Refinance Break-Even Point?
The refinance break-even point is the time needed for your recurring savings to recover the upfront cost of refinancing.
A simple calculation is:
Upfront refinance costs ÷ monthly savings = approximate break-even period in months
Suppose you pay $4,800 in refinance costs and reduce your monthly payment by $200:
$4,800 ÷ $200 = 24 months
In this example, you would reach the simple break-even point after about two years. If you expect to sell the home or replace the mortgage before then, the monthly savings may not recover the upfront costs.
This calculation is a starting point. It does not fully account for changes in the loan balance, repayment term, mortgage insurance, tax treatment or total interest. You can use our refinance break-even calculator to compare the estimated costs and savings.
When Does Refinancing Make Sense?
Refinancing can make sense when the new loan supports a clear financial goal and the expected benefit is large enough to justify the costs. There is no universal rule requiring mortgage rates to fall by a specific percentage before you refinance.
You Can Reduce Your Borrowing Costs
A lower interest rate can reduce your monthly principal and interest payment and the interest charged over time. The result depends on the new loan balance, term, closing costs and how long you keep the mortgage.
You Want a More Predictable Payment
Refinancing from an adjustable-rate mortgage to a fixed-rate mortgage can provide a principal and interest payment that does not change because of future rate adjustments. Taxes, insurance and other housing expenses can still change.
You Want to Pay Off the Mortgage Sooner
Moving from a longer remaining term to a shorter term can reduce the number of years you carry the mortgage and potentially lower total interest. A shorter term can also increase the required monthly payment.
You Can Remove Mortgage Insurance
Refinancing may provide a path to remove mortgage insurance if your equity and the new loan program allow it. Whether refinancing is necessary depends on the type of mortgage insurance attached to your current loan and the cancellation rules that apply to it.
You Need to Change the Borrowers on the Loan
A refinance can add or remove someone from the mortgage if the remaining borrowers qualify for the new loan. Changing responsibility for the mortgage does not automatically change ownership under the property deed.
You Want to Access Home Equity
A cash-out refinance can provide a lump sum from your equity, but it is not the only option. Compare the cost of replacing the full first mortgage with the cost of keeping it and adding separate home equity financing.
When Might Refinancing Not Make Sense?
Refinancing may provide little benefit when:
- You expect to sell or pay off the loan before reaching the break-even point.
- The closing costs outweigh the expected savings.
- The new loan would restart or substantially extend your repayment period.
- Your current mortgage has a lower rate or better terms.
- The new mortgage would add costly mortgage insurance or program fees.
- You would replace a favorable first-mortgage rate to borrow a relatively small amount of equity.
- Your income, credit or property value limits the available terms.
Compare the total costs and benefits of the new loan instead of making the decision based only on a lower monthly payment.
Refinance Alternatives to Compare
If your goal is to borrow against your equity, you may be able to leave the current first mortgage in place and add a second mortgage. The better structure depends on your existing rate, the amount you need, repayment preferences and available terms.
HELOC vs. Cash-Out Refinance
A home equity line of credit, or HELOC, is revolving credit secured by your home. It generally leaves your first mortgage in place and lets you borrow from an approved credit line during a draw period.
A cash-out refinance replaces the current first mortgage and provides eligible proceeds through a larger new loan. The differences between a HELOC and a cash-out refinance include how the interest rate works, whether the first mortgage is replaced and how you access the money.
Cash-Out Refinance vs. Home Equity Loan
A home equity loan is generally a separate installment loan with a fixed repayment schedule. A cash-out refinance replaces the existing first mortgage.
The differences between a cash-out refinance and a home equity loan include which mortgage is replaced, how the rate is structured and whether you make one mortgage payment or two.
Second Mortgage vs. Refinance
The main difference between a second mortgage and a refinance is whether you keep or replace your existing first mortgage.
A second mortgage adds another loan secured by the property while leaving the first mortgage in place. A refinance typically replaces the first mortgage with a new one.
Keeping the first mortgage can preserve its existing rate and term, but it also means managing another payment and lien.
The Bottom Line
Mortgage refinancing replaces your existing home loan with a new mortgage. The new loan can change your interest rate, monthly payment, repayment term, loan program or principal balance.
Before refinancing, compare the new loan with the mortgage you already have. Review the closing costs, break-even point, total interest, new payoff date and how long you expect to keep the loan. A lower rate or payment can be useful, but the full cost of the refinance determines whether it supports your financial goal.
Frequently Asked Questions
What Happens to Your Old Mortgage When You Refinance?
The new mortgage pays off the amount due on your existing loan. After the payoff is processed, the prior mortgage lien is released through the applicable recording process. You then make payments on the new mortgage.
Do You Lose Equity When You Refinance?
A refinance can reduce your equity if the new loan balance increases. This can happen when you finance closing costs or complete a cash-out refinance. A rate-and-term refinance with a similar balance does not inherently eliminate the equity you have built.
Can You Refinance With the Same Lender?
Yes. You can refinance with your current lender or another lender, subject to approval. Compare the complete loan terms and costs rather than assuming your current lender will automatically provide the most favorable option.
Do You Need an Appraisal to Refinance?
Not always. Some refinances require a traditional appraisal, while others qualify for an appraisal waiver, alternative valuation method or streamline process. The requirements depend on the loan program, transaction and underwriting findings.
How Long Does a Mortgage Refinance Take?
The timeline depends on the loan type, required documents, appraisal process, title review, underwriting conditions and lender workload. Property or title complications can extend the process, while an appraisal waiver or streamlined underwriting may reduce the number of required steps.
Can You Refinance Immediately After Buying a House?
Your eligibility depends on the loan program, refinance type, ownership history, mortgage payment history and applicable seasoning rules. Some refinance programs require you to wait a specified period or make a minimum number of payments.
Can You Refinance More Than Once?
Yes. There is no universal lifetime limit on the number of times you can refinance. Each new transaction must satisfy current loan requirements and provide enough benefit to justify its costs.
Does Refinancing Hurt Your Credit?
Applying for a refinance generally involves a hard credit inquiry. Closing the refinance also replaces one mortgage account with another. The credit effect depends on your overall credit history, balances, payment record and other recent applications.
Can You Back Out of a Refinance?
Federal law provides a right of rescission for many refinances and other non-purchase mortgages secured by your principal residence. The CFPB explains that covered borrowers generally have three business days to cancel.
The right does not apply to every refinance. Federal rules contain exceptions for some refinances completed with the same creditor, although new money advanced in the transaction may still be subject to rescission. Transactions secured by property that is not your principal residence are also generally outside the federal rescission rule. Review your closing documents and cancellation notice for the rules governing your loan.
Is Refinancing the Same as Getting a Second Mortgage?
No. Refinancing generally replaces your existing first mortgage. A second mortgage adds another loan secured by the property and usually leaves the first mortgage in place.
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