How a refinance works
A refinance pays off the mortgage you have and replaces it with a new one.
Homeowners refinance to change the interest rate, the length of the loan, or both. Some also take cash out of equity. The new loan is underwritten from scratch. The old one is paid off at closing.
A lower rate is not automatically a savings. Closing costs, the new term, and how long you will keep the loan decide whether the math works.
- Rate-and-term refinance
- Cash-out refinance
- Break-even
- Loan term
Ways a refinance is used
01
Rate-and-term
You replace the current mortgage to change the rate, the term, or the rate type, without pulling equity out as cash. Rolling closing costs into the balance still increases what you owe.
02
Cash-out
The new loan is larger than the payoff. You receive the difference, minus costs, as cash. The entire first mortgage is rewritten, so compare the new rate with the rate you already have.
03
Break-even
Divide the closing costs you pay in cash by the monthly principal-and-interest savings. That is a rough count of months before the refinance covers its own cost. Selling or refinancing again before then can erase the benefit.
04
A longer term
Stretching the remaining balance over 30 new years can cut the payment even when the rate barely changes. You may pay more interest over the life of the loan because the clock starts over.
Questions to answer first
- What is the rate and remaining term on the loan you have now?
- Will you pay closing costs in cash, or add them to the balance?
- How many years do you expect to keep the house?
- Are you trying to lower the payment, pay the loan off sooner, or take cash out? Those are different loans.
Related guides
Estimate a payment with the mortgage calculator.
MortgageDirectory.com explains how home loans work. It is not a lender, broker, or quote service, and nothing here is personal financial, tax, or lending advice. Rates, fees, and approvals come from lenders and depend on your situation.