How to Refinance a Mortgage: A Beginner’s Guide
Refinancing has upfront costs, but you can save over time — especially if you time it right (like when rates drop).
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Editor & Content Strategist Nerdy takeaways
- When you refinance, you get a new mortgage to replace your old one. You usually pay closing costs and fees.
- Set a goal first. For example: Lower your interest rate, tap home equity or pay off your loan faster.
- Just like shopping for a purchase loan, it pays to compare lenders to get the best refinance mortgage rate.
Do lower mortgage rates have you thinking about refinancing? 🤔 You’re in good company.
But refinancing your mortgage isn’t free — you’ll pay upfront fees (usually thousands of dollars). Still, it can make financial sense over the long term. A mortgage refinance can lower your monthly payment or help you pay off your loan sooner.
Below, we break down how mortgage refinancing works and how to decide if it makes sense for you.
What is mortgage refinancing?
Mortgage refinancing is when you swap out your existing mortgage for a new one. You still own your house — you’re just changing the loan that pays for it.
In simple terms:
- 💰You get a new loan.
- 🔄The new loan pays off the old loan.
- 🏠Then you start making payments on the new loan instead.
🤓 Nerdy Tip
If you want to save money, it’s often worth it to refinance if today’s mortgage rates are 0.5 to 0.75 of a percentage point lower from your current rate. When should I refinance my mortgage?
Many people refinance when mortgage rates drop. Replacing a higher rate with a lower one can trim your monthly payment, but that’s not the only reason to refinance. You might refinance to:
- Lower your monthly payment.
- Get a lower interest rate.
- Switch to a different type of loan.
- Add or remove a borrower.
- Borrow money from the value of your house (a cash-out refinance).
- Change how long you have to pay the loan back (like a 30-year to a 15-year mortgage).
Refinancing doesn’t automatically reset you to day one of a new 30-year loan. You can often choose a custom term, like 17 or 27 years, based on how much time you have left. You can restart a 30-year mortgage if you want to — it will lower your monthly payments — but you’ll pay a lot more in interest over time.
» MORE: When to refinance a mortgage
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How much does it cost to refinance?
When you refinance, you typically pay closing costs and fees that run 2-6% of the new mortgage amount. For example: A $300,000 mortgage refinance would cost $6,000 to $18,000.
Nerdy Perspective
Will a no-closing-cost refinance save me money?
A no-closing-cost refinance sounds great, but it isn’t always the best deal. A “free” refinance usually means the lender rolls in the fees somewhere else (like a higher interest rate). If you plan to stay in the house a long time — say, longer than 5 years — it might make more financial sense to just pay the closing costs upfront. Your best bet is to get multiple Loan Estimates and compare terms side by side.
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It can take years to break even from a refinance. Here’s how to get the best deal:
- Shop around. Get a Loan Estimate from at least three lenders so you can compare the rate, APR and lender fees side by side.
- Run the numbers. Use a refinance calculator to see how the new loan stacks up against your current one — how much you’ll save on your monthly payment or total mortgage interest over time.
- Find your break-even point. Divide your closing costs by your monthly savings to see how long it’ll take to actually come out ahead.
Some lenders or loan types require a 6-12 month waiting period before you can refinance. In general, you can refinance as often as you want (or need) to. However, it might not always make financial sense because of upfront costs and fees.
How does refinancing a mortgage work?
The process of getting a refinance mortgage is similar to applying for a mortgage to purchase a home. Usually, it’s a little easier and faster, since you aren’t house hunting. From application to closing, it usually takes 30 to 60 days to close on a mortgage.
Here’s what to expect during a mortgage refinance, step by step:
- Pick a goal. Before you start, be clear on why you’re refinancing — for example, to lower your monthly payment or pay off your mortgage faster. That goal should guide the type of loan you choose.
- Review the details of your current mortgage. Next, look up your current loan balance and estimate your home’s value. It helps to have a rough idea of how much home equity you have.
- Get your finances in order. Check your credit score and make sure you have cash set aside for closing costs. Avoid big money moves like taking on new debt or changing jobs, which can raise red flags with lenders.
- Shop around and pick a lender. Get a mortgage preapproval from at least three lenders. Compare APR, closing costs and fees. When you choose the best offer, you’ll lock in your mortgage rate and start the official application process.
- Submit your application. Most lenders let you securely connect digital accounts to verify your income and assets online. You might still need digital copies of some documents.
- Go through underwriting. During mortgage underwriting, the lender verifies your finances. This step takes a few days to a few weeks, depending on the lender and your situation.
- Schedule a home appraisal. Many, but not all, mortgage refinances require a home appraisal to confirm your home’s market value, which typically costs a few hundred dollars. If your home was recently appraised, or you’re getting a government-backed streamlined refinance, you might skip this step.
- Close on the loan. Sign the final paperwork, pay any closing costs and your new mortgage replaces the old one.
🤓 Nerdy Tip
If this feels like too much work, you can hire a mortgage broker. Brokers shop multiple lenders for you and manage the back-and-forth. Another perk: Brokers have access to wholesale mortgage rates, which are typically lower than the retail rates you find on your own. Common types of refinance mortgage loans
Refinance loans come in all shapes and sizes, including conventional and government-backed loans. Popular refinance loan types include:
- Rate and term: This is the most common type of mortgage refinance. Replace your existing mortgage with a new interest rate, repayment term or both. Your existing loan balance isn’t affected.
- Cash-out refinance: Take out a new mortgage for more than you owe and receive the difference in cash to use as needed.
- No-closing-cost refinance: Avoid paying upfront closing costs by rolling them into the loan or accepting a higher interest rate (which might end up costing you more over time).
- Renovation refinance: Finance home improvements by rolling renovation costs into your mortgage based on the home’s projected value.
- Cash-in refinance: Make a lump sum payment to reduce your loan balance, while also getting the benefits of a new mortgage loan (like a lower interest rate or new term length).
- Streamline refinance: A simplified refinance, often for government-backed loans, with reduced paperwork and sometimes no appraisal required.
If you want a deeper dive into government-backed refinance options, check out our guides to:
How hard is it to refinance a mortgage?
Refinancing is often easier than getting a mortgage for the first time. Here’s why it can be simpler:
- You already own the home. There’s no home search or purchase contract involved.
- You have a payment history. If you’ve made on-time payments, that helps your application.
- You may have built equity. More equity can make you less risky to lenders.
It’s possible to refinance your mortgage with bad credit, but stronger credit (a score of 740 or above) means you’ll qualify for the best rates. A lender credit check may cause a small, temporary dip. To minimize the impact to your credit score, aim to get all your refinance preapprovals within a 45-day window.
» MORE FOR CANADIAN READERS: How to refinance a mortgage
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