How Mortgage Refinancing Works
Refinancing replaces your existing mortgage with a new loan, typically at a lower interest rate. The new loan pays off the old one, and you begin making payments on the new terms. The goal is usually to reduce your monthly payment, shorten your loan term, or tap into home equity.
Types of Refinancing
- Rate-and-term refinance: Change your interest rate, loan term, or both without borrowing additional money. Most common type.
- Cash-out refinance: Borrow more than your current balance and receive the difference as cash. Useful for home improvements or debt consolidation.
- Cash-in refinance: Bring cash to closing to reduce your loan balance, often to eliminate PMI or qualify for a better rate.
Understanding Closing Costs
Refinancing is not free. Common closing costs include:
| Fee | Typical Cost |
|---|---|
| Origination fee | 0.5–1% of loan |
| Appraisal | $300–$600 |
| Title search & insurance | $500–$1,500 |
| Recording fees | $50–$250 |
| Discount points | 1% of loan per point |
Total closing costs typically range from 2–5% of the loan amount.
Break-Even Analysis
The break-even point tells you how long it takes for monthly savings to offset closing costs:
Break-even months = Closing costs ÷ Monthly savings
If you plan to stay in your home longer than the break-even period, refinancing is likely worth it. If you might move or refinance again sooner, you may not recoup the costs.
Points: When to Buy Down Your Rate
Paying discount points reduces your rate but increases upfront costs. Points make sense when:
- You plan to keep the loan for many years (past the break-even point)
- You have cash available at closing
- The rate reduction is meaningful (typically 0.25% per point)
This calculator factors points into the APR so you can see the true effective rate.
When to Refinance
- Rate drop of 0.5–1%+ from your current rate
- Improved credit score since your original mortgage
- Switch loan type (e.g., adjustable to fixed rate)
- Remove PMI if your equity has increased above 20%
- Shorten loan term to pay off faster and save on total interest
- Access equity for major expenses via cash-out refinance