🤓 The basics: How mortgage refinancing works
When you refinance, you get a new mortgage to replace your old one. The new mortgage pays off the balance of your old home loan. Often, people refinance when today’s refinance rates drop below their existing mortgage interest rate. You’ll pay closing costs and fees, just like you did when you bought your house. After paying the upfront fees, it can take a few years to reach the break-even point, or when refinance savings outweigh costs. The steps to refinance are similar to when you got a mortgage to buy your house:
Get your finances in order.
Finalize (“close”) the loan and pay any refinance closing costs.
💰 How much does it cost to refinance?
Refinancing isn’t as pricey as when you bought your home, but it isn't cheap. Closing costs typically run 2% to 6% of the total loan amount.
🤔 Should I refinance my mortgage?
If you time it right, a mortgage refinance can help you save money or build wealth faster. But that’s not always the case. Sometimes, a mortgage refinance is necessary to support a different goal.
Here are some common reasons to refinance your mortgage.
Reducing your interest rate.
Making smaller monthly payments.
Borrowing against your home equity and getting the difference in cash. Paying off your mortgage faster.
Dropping FHA mortgage insurance.
Switching loan types, such as from an adjustable-rate to a fixed-rate loan.
Adding a borrower, such as a new spouse.
Refinancing is a big decision, so it’s normal to feel a little nervous before you talk to a mortgage lender. For a script with sample sentences, check out our guide on what to say when applying to refinance. While you can refinance as often as you want, some lenders require a waiting, or “seasoning,” period of six to 12 months between loans.
🏠 Common types of mortgage refinance loans
Just like purchase loans, you can choose from a conventional loan — the most common type — or a government-backed mortgage from the Federal Housing Administration (FHA loans), Department of Veterans Affairs (VA loans) or U.S. Department of Agriculture (USDA loans). Here are the most popular categories of mortgage refinance loans:
For more on streamline refinance loans, check out these deep dives from the Nerds:
What about "no closing cost" refinances?
You might see lenders offering no-closing-cost refinances. These are the "free lunch" of the mortgage world — but as the saying goes, there is no such thing as a free lunch. While you won't pay upfront fees with a no-closing-cost refi, those costs will be built into the loan — often in the form of a higher interest rate. 🔎 Finding the best mortgage refinance company
To get the best mortgage refinance rate, get at least three different quotes — or ask a mortgage broker to shop around on your behalf. It might be easy to refinance with your original mortgage lender, but they might not offer you the best deal. See our guide on how to choose a mortgage lender for more shopping advice. ⚠️ Can I refinance a mortgage with a bad credit score?
In general, expect to pay higher interest rates and fees. Most lenders like to see a credit score of 620 or above for a mortgage refinance.
✅ Mortgage refinancing: Pros and cons
Sometimes it’s a good idea to refinance your mortgage, but that’s not always the case. The pros and cons of refinancing depend on your personal circumstances. Here are a few common ones to consider — they might not all apply to you.
Pros-
Lowering your monthly payment.
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Building home equity faster.
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Accessing home equity for renovations or other expenses.
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Separating your finances from your ex (when removing a name from a mortgage).
Cons-
Paying upfront fees and closing costs.
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Potentially paying more interest over time (if you lengthen the loan term).
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Potentially using your home as collateral to pay off debt.
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Costs might outweigh fees, if you move or sell before the break-even point.
