How to Refinance Your Mortgage
Refinancing replaces your current mortgage with a new one — ideally at a lower rate, shorter term, or to access equity. Learn the 6-step refinance process, how to calculate your break-even, and when refinancing actually makes financial sense.
What refinancing is
Refinancing replaces your existing mortgage with a new loan — new rate, new term, new lender (optional). You go through full underwriting again. Closing costs are 2–5% of the loan. The benefit must outweigh those costs before refinancing makes financial sense.
Types of refinance
| Type | Goal | Cash out? | Best for |
|---|---|---|---|
| Rate-and-term | Lower rate or shorter term | No | Reducing payment or total interest |
| Cash-out | Access home equity as cash | Yes | Home improvements, debt consolidation |
| FHA Streamline | Lower rate on existing FHA loan | No | FHA borrowers; no appraisal required |
| VA IRRRL | Lower rate on existing VA loan | No | Veterans; minimal documentation |
| HELOC (not a refi) | Access equity without refinancing | Drawn as needed | Protecting a sub-4% first mortgage |
6 steps to refinance
- Step 1 Calculate your break-even and set a rate goal
Divide your estimated closing costs by your expected monthly savings to find break-even months. Only refinance if you plan to stay longer than that. A 1% rate reduction on a $400,000 loan saves about $250/month — break-even on $10,000 closing costs is 40 months.
- Step 2 Check your credit and home value
Pull your credit report from AnnualCreditReport.com. Dispute any errors before applying — corrections take 30–60 days. Check your home's estimated value on Zillow, Redfin, or the county assessor's website. Your loan-to-value ratio determines eligibility, rate, and whether you will owe PMI.
- Step 3 Gather documents
Refinance lenders need the same documentation as purchase lenders: 2 years W-2s or tax returns, 2 recent pay stubs, 2–3 months bank statements, current mortgage statement, and government-issued ID. Self-employed borrowers need 2 years of business returns plus a year-to-date P&L.
- Step 4 Shop at least 3 lenders in a 14-day window
Get Loan Estimates from 3+ lenders on the same day. Compare APR (which includes fees), origination costs, and total closing costs — not just the rate. Multiple mortgage hard inquiries within 14 days count as one inquiry under FICO scoring rules. Check your current lender last; they sometimes offer competitive retention rates.
- Step 5 Lock your rate
Once you choose a lender, lock the rate in writing. Standard locks are 30–45 days. If your closing timeline is longer, ask for a 60-day lock (typically adds 0.125–0.25% to the rate). Get the rate lock confirmation in writing, including the expiration date and any float-down option.
- Step 6 Close and restart your amortization clock
At closing, you sign the new loan documents and pay (or roll in) closing costs. Your old mortgage is paid off by the new one. Your payment schedule restarts at Month 1. If you are refinancing mid-amortization, consider making extra principal payments to recover the equity-building pace you had on the old loan.
When refinancing makes sense — and when it does not
Refinance makes sense when…
- New rate is at least 0.75–1% below current rate
- Break-even is shorter than your expected remaining hold period
- You are switching from an ARM to a fixed rate for certainty
- You want to shorten the term (30 → 15 year) to save total interest
- You need equity access and have a high first-mortgage rate (cash-out makes sense)
Avoid refinancing when…
- You plan to move within 2–3 years (won't hit break-even)
- You are deep into amortization — most principal is already being paid
- Rate savings are under 0.5% — closing costs eat the benefit
- Your rate is already below 4% — a HELOC is cheaper for equity access
Common questions
How much does refinancing cost?
Refinance closing costs typically run 2–5% of the loan amount. On a $400,000 loan, that is $8,000–$20,000. Common costs: loan origination fee (0.5–1%), appraisal ($300–$700), title insurance (0.5–1%), recording fees ($50–$200), and prepaid interest (up to 30 days). Some lenders offer "no-cost" refinances by rolling fees into the rate (you pay a slightly higher rate to avoid upfront cash). The CFPB Loan Estimate standardizes how these costs are disclosed so you can compare lenders accurately.
How do I calculate my break-even on a refinance?
Break-even months = Total closing costs ÷ Monthly savings. Example: $10,000 in closing costs, new payment saves $250/month → break-even = 40 months (3.3 years). If you plan to stay longer than 40 months, the refinance saves money overall. If you plan to move or refinance again before then, it does not. Note: if you roll closing costs into the loan, your monthly savings are smaller and break-even extends. Also account for resetting your amortization — if you are 7 years into a 30-year and refinance into a new 30-year, you have extended your debt by 7 years even at a lower rate.
What credit score do I need to refinance?
Minimum credit score requirements for refinancing are similar to purchase requirements: 620 for conventional, 580 for FHA, no minimum for VA (but lenders typically set 580–620). For the best rates on a conventional refinance, you generally need 740+. Scores below 680 will face rate adjustments (LLPAs) that can significantly narrow the benefit of refinancing. Check your score at AnnualCreditReport.com before applying.
Can I refinance with low equity or an underwater mortgage?
With conventional loans, you generally need at least 20% equity to refinance without PMI; some lenders allow refinancing at 95% LTV with PMI. The Fannie Mae High-LTV Refinance Option (HIRO) and Freddie Mac's Enhanced Relief Refinance allow refinancing with minimal equity for existing GSE-backed loans. FHA Streamline Refinance allows existing FHA borrowers to refinance without a new appraisal, regardless of LTV.
How long does a refinance take?
Most refinances close in 30–60 days from application. The timeline depends on the lender's capacity, complexity of your file (self-employment, investment properties, and recent credit events slow things down), appraisal scheduling, and title search. During high-volume refinance waves, timelines can stretch to 75–90 days. You can lock your rate at application; most locks are 45–60 days with extension options.