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Mortgage refinance: How to get started

Marcie Geffner
Updated 8 min read

A mortgage refinance involves replacing your existing home loan with a new mortgage for the same property. The funds from your new mortgage are used to pay off your existing loan, and you start making mortgage payments on the new one instead.

There are many reasons to refinance your mortgage loan. You may want to reduce your interest rate, lower your monthly mortgage payment, avoid paying mortgage insurance premiums, or borrow from the equity you’ve built up in your real estate.

Here’s when you might want to consider a refinance — and how to make it happen.

Dig deeper: Is now a good time to refinance your mortgage?

Refinancing can help you achieve many goals. Here are five that may fit your situation:

If current mortgage rates are lower than the rate on your existing mortgage, you may save money by refinancing to a lower interest rate. Your monthly payment may also be lower.

The free Yahoo Finance mortgage calculator could help you estimate how much of your monthly payment would be applied to principal and interest with a lower rate. You can also use a refinance calculator to determine if refinancing is the right move. This requires calculating the break-even point — or the amount of time before the refinance saves you more than it cost.

A fixed interest rate protects you from rate fluctuations that could trigger a higher payment with an adjustable-rate mortgage. An adjustable rate can give you a lower payment for an initial set period, after which your payment may increase if rates move higher.

Dig deeper: Adjustable-rate vs. fixed-rate mortgage: Which should you choose?

With a shorter term, such as 15 years instead of 30, your payment typically will be higher, but you should pay less interest expense over the lifetime of your loan. With a longer term, say 30 years instead of 15, your payment typically will be lower, but you'll probably pay more interest expense over your loan's lifetime.

Some types of loans allow borrowers to cancel their private mortgage insurance (PMI) when they have enough equity in their home. If your loan doesn't allow cancellation of mortgage insurance at any level of equity, you'll have to refinance into a new loan to stop paying for it.

A change in personal or family circumstances, such as a divorce between co-homeowners or an inheritance, may make refinancing necessary to update who's responsible for repaying the loan.

Learn more: 5 ways to prepare for your mortgage refinance

One time when you may not want to refinance is when you're planning to sell your home in the next few years. In that case, the benefits of refinancing may not outweigh the costs and the time involved to complete the refinance process.

There are seven types of mortgage refinance options you might consider. The right choice depends on your goals, your budget, how much home equity you have, and other factors. Your three loan options include:

A rate-and-term refinance occurs when your new loan amount equals your current loan's outstanding balance. Your rate, repayment term, or other aspects of the loan may be changed. You may also change from your current lender to a new one.

A streamline refinance occurs when you replace your current loan with a new loan of the same type and the paperwork and documentation requirements are simplified.

Three types of loans that allow streamline refinancing are FHA loans that are insured by the Federal Housing Administration (FHA), VA loans that are insured by the U.S. Department of Veterans Affairs (VA), and USDA loans that are insured by the U.S. Department of Agriculture (USDA).

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A cash-out refinance loan is when your new loan amount is significantly higher than your current loan's outstanding balance and the difference is paid to you in cash. This type of refinance reduces your equity in your home, but allows you to use the cash for home improvements or other expenses.

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A cash-in refinance is essentially the opposite of a cash-out refinance. Instead of taking out a larger mortgage and receiving cash, you put more money down when you refinance so you can take out a smaller mortgage. This results in lower monthly payments and less interest paid over the life of the loan.

As the name suggests, a no-closing-cost refinance means you don't have to pay any fees at closing. However, the lender will usually make up that money from you in one of two ways: They'll either roll the closing costs into your mortgage principal, or they'll cover the closing costs but charge you a higher interest rate in return.

A short refinance is an option when you're underwater on your mortgage, meaning you owe more on your loan than the house is currently worth. This type of refinance replaces your current home loan with one for less than what you owe. Your monthly payments will be lower, and you get to stay in your house. Some lenders will agree to a short refinance because even though it isn't ideal, it can be a better deal for them financially than going through the foreclosure process.

Read more: What to do when you have an underwater mortgage

A reverse mortgage isn't technically a type of refinance, but there are some similarities. Like with a cash-out refinance, you use a reverse mortgage to tap your home equity. Rather than making payments to a lender to pay down your loan, you'll receive money and your debt will increase. A reverse mortgage is an option for senior citizens that allows them to have more money in retirement.

Refinancing isn't free. As with your first loan, these come with closing costs — things like an appraisal fee, loan origination fee and title search and insurance costs.

One type of fee that you may encounter when you refinance is optional. It's called a "buydown" or “discount points” and it's a strategy for lowering refinance rates. If you elect to pay it, you should receive a lower mortgage interest rate for an initial period for your new loan.

Some borrowers choose to pay these upfront costs in cash. Others prefer to wrap the costs into their loan through a higher loan amount or a higher interest rate. Which option you choose may depend on your personal financial situation and how much cash you have available.

Regardless of your reasons for refinancing, you should shop around for your lender. Fill out a loan application with several refinancing lenders, and compare quotes to find the lowest rates available to you. The rates and fees you'll be quoted will depend on your income, your credit score, your loan term, the type of loan you want, your desired loan amount, and your home's current value, among other factors. Keep in mind that qualifying and underwriting requirements will vary from lender to lender too.

Read more: How soon can you refinance your mortgage after buying a home?

Refinancing a mortgage means replacing your original one with a new one — one that could have different terms or rates. You then use the funds from your new mortgage to pay off your old one.

Refinancing a mortgage can be a good idea if it will help you financially. For example, if you can get a lower mortgage rate by refinancing, you could save money on your monthly payments and pay less in interest in the long run. But it usually isn't a good idea to refinance if you plan to move soon because the amount you save probably won't make up for the amount you pay up-front in closing costs.

It can be hard to refinance a mortgage if you're in a tough financial spot because you might not get the terms you want. Otherwise, refinancing isn't necessarily harder than getting your original mortgage. Lenders will require a certain credit score, loan-to-value ratio (LTV), and debt-to-income ratio (DTI), though these vary by company and loan program.

Refinancing your mortgage may hurt your credit in the beginning, as it requires a hard credit inquiry and, sometimes, increases your debts. This ding is usually temporary, though, and as long as you make on-time payments each month, it should improve your credit score over time.

It depends on the mortgage lender, but refinancing typically takes about four to six weeks. As of early June 2024, the average closing time for a refinance was 43 days, according to ICE Mortgage Technology.