Refinancing a mortgage: What it means and how it works

Refinancing replaces your current mortgage with a new one, ideally at a lower rate or better terms. “You generally need to cut at least a full percentage point from your rate for refinancing to make sense,” says Jeff Ostrowski, Bankrate’s housing market analyst.

However, refinancing isn’t free. Closing costs run 2% to 5% of your loan amount — $6,000 to $15,000 on a $300,000 loan — so your new rate has to be low enough to clear that cost before you come out ahead.

Most borrowers don’t check first. In 2025, 79% of refinance borrowers paid above the most competitive rate available, according to Bankrate’s Hidden Homeownership Tax research, which analyzed 3.2 million mortgage originations. That overpayment cost the typical borrower $3,343 a year — $278 a month — over the life of the loan. Comparing lenders before you refinance is the step most people skip. It’s also the one most likely to save you money.

How does refinancing work?

Refinancing works much like your original mortgage application process: the lender reviews your finances to assess your risk level and determine your eligibility. Knowing what to expect can help the refinance process go smoothly.

Step 1: Set a clear financial goal

Homeowners refinance for a few core reasons: to secure a lower rate, change their loan term or type or tap their home equity. Securing a lower rate is often the most compelling reason to refinance. After all, overpaying on your mortgage costs the typical borrower $3,343 a year, according to Bankrate’s Hidden Homeownership Tax research.

Step 2: Check your credit score and history

Qualifying for a refinance works much like qualifying for your original mortgage — lenders will review your credit score, income, debts and assets. The higher your credit score, the more likely you are to qualify and receive a better rate. For a conventional refinance, a credit score of 620 or higher is generally required for approval, but the most competitive rates are typically reserved for borrowers with scores above 780.

Plus, when you refinance, you’re closing one loan and opening another. That resets part of your credit history — which makes up 15% of your FICO score — so it’s worth timing your refinance when you’re not also opening other credit.

Step 3: Determine how much equity you have

Your home equity is the total value of your home minus the amount you still owe on your mortgage. Your equity grows as you pay down your principal and as your home’s market value increases.

To get a rough estimate of your equity, check your latest mortgage statement to see your current balance. Then, check home search sites or have a professional appraisal to estimate your home’s value. 

Your home equity is the difference between the two. For example, if you owe $250,000 on your home, and it’s worth $450,000, your home equity is $200,000, or roughly 44% of your home’s value.

Step 4: Shop multiple mortgage lenders

Get quotes from at least three lenders before you commit — including at least one outside your current bank. Comparing offers before you refinance is the single most effective way to lower your rate, and it’s the step most borrowers skip: 79% of refinance borrowers overpaid on their mortgage in 2025, according to Bankrate’s Hidden Homeownership Tax research.

“Checking with your existing lender is easier, but you risk leaving money on the table. Comparing offers can secure lower rates and lower upfront closing costs, both of which could save you thousands. Approach your refinance with as much rigor as you did when you first shopped for a home,” says Kates.

Compare today’s refinance rates

The average homeowner leaves thousands on the table by not comparing rates. Compare refinance offers and see what you could actually save before you commit.

Learn more

Step 5: Get your paperwork in order

Gather recent pay stubs, W-2s, tax returns and bank and brokerage statements. Your lender will also want to verify your assets and liabilities, so have a complete picture of your finances ready.

Step 6: Prepare for the home appraisal

Most refinances require a home appraisal to determine your property’s current market value. An independent appraiser evaluates your home against similar properties in your area — though if you’re pursuing an FHA streamline refinance, you may be able to skip this step entirely.

Step 7: Come prepared to the closing table

You’ll receive a closing disclosure at least three business days before closing — a document that itemizes all the costs required to finalize your loan. Review it carefully and compare it against the loan estimate you received earlier to flag any unexpected changes. These payments will be made at closing and typically require cashier’s checks or money orders.

Step 8: Keep tabs on your loan

Some lenders offer a small rate discount, typically 0.25 percentage points, for enrolling in autopay. It’s a worthwhile perk, but still review your statements regularly to catch any billing errors or escrow changes. Store copies of your closing paperwork in a safe place.

Types of mortgage refinances

The type of refinancing that fits your needs depends on what you’re trying to accomplish. Here’s how each one works and who it’s actually built for.

• Rate-and-term

  A rate-and-term refinance changes your loan’s interest rate, the loan’s term or both. It’s the most common type of mortgage refinancing and tends to make the most sense when market rates have dropped below your current rate — particularly if your credit score is 780 or higher, at which point you’re most likely to qualify for the best available offers.

• Cash-out

  With a cash-out refinance, you borrow against your home equity and receive the difference in cash. This increases your mortgage balance and typically comes with a higher rate than a standard refinance, so it works best for funding major, concrete goals (like a home renovation that adds value) rather than discretionary expenses. Be clear-eyed about the tradeoff: you’re putting your home on the line for liquidity.

• Cash-in

  A cash-in refinance works in the opposite direction: You bring a lump sum payment to closing to pay down your balance, which lowers your loan-to-value (LTV) ratio (the percentage of your home’s value that you still owe). This can help you qualify for a better rate, reduce your monthly payment or eliminate PMI if you’ve been paying it.

• No-closing-cost

  A no-closing-cost refinance rolls closing costs into your loan rather than requiring upfront payment, which means a higher loan balance, a higher monthly payment and typically a higher rate than you’d get by paying closing costs outright. It’s worth considering if you don’t have the cash savings on hand to cover upfront costs, but run the numbers carefully: The long-term cost is almost always higher.

• Streamline

  If you have a VA loan, ask about a VA Interest Rate Reduction Refinance Loan (IRRRL) specifically — the VA’s version of a streamline refinance, with reduced documentation and no appraisal in most cases. VA borrowers shouldn’t assume that speed means they’re getting the best deal: 81% of VA borrowers overpaid on their mortgage in 2025, according to Bankrate’s Hidden Homeownership Tax research. Compare IRRRL offers from multiple VA-approved lenders before you commit. Streamline refinancing is also available for FHA and USDA loans.

Pros and cons of mortgage refinancing

No refinance is right for every situation. Use this as a gut-check before you decide:

Pros

• A lower interest rate can reduce your monthly payment and free up room in your budget.
• You could pay off your loan faster by shortening your term.
• A cash-out refinance lets you access your home equity for major expenses.
• You could change from an adjustable-rate loan to a more predictable fixed-rate mortgage.
• If your equity has grown beyond 20%, refinancing may allow you to eliminate PMI.

Cons

• Closing costs typically run 2–5% of the loan amount and are due at signing unless rolled into the loan.
• Resetting to a longer term means paying more interest over time, even if your rate drops.
• A cash-out refinance reduces your equity and increases your debt load.
• Refinancing triggers a hard credit inquiry, which may temporarily lower your score.

When should you consider mortgage refinancing?

The decision to refinance isn’t just about rates; it’s about timing. How long you plan to stay in your home, what you’re hoping to achieve and how rates compare to your current loan should all factor into your decision. If you plan to stay in the home longer than your break-even point, refinancing is likely worth it. If you’re planning to move within a year or two, the math usually won’t work in your favor no matter how good the rate looks.

“But the decision varies depending on your situation. Maybe you have an FHA loan and refinancing would let you get out of mortgage insurance — that savings could nudge you toward a refi. Or perhaps you live in a state that taxes refinances — that could push the costs to a point that it doesn’t make sense,” says Ostrowski.

Market conditions matter too. If current rates are higher than what you’re already paying, refinancing will cost you more over time, full stop. The only exceptions would be specific goals like eliminating FHA mortgage insurance or tapping equity for a high-priority need, and even then, the tradeoff deserves careful scrutiny.

The break-even point, or how long it takes for your monthly savings to offset closing costs, is the most practical way to evaluate a refinance. Here’s how the math looks on a $400,000, 30-year mortgage at 7% interest, assuming 3% closing costs ($12,000):

“For homeowners who took loans at 7% or 8%, now is a great time to refinance,” says Ostrowski. “For most homeowners, though, the moment has yet to arrive.”

Frequently asked questions

• What does it cost to refinance a mortgage?

  Closing costs on a mortgage refinance typically range from 2% to 5% of the loan amount and may include discount points, origination fees, an appraisal, title insurance and recording fees.

  Before committing, calculate your break-even point: divide your total closing costs by your monthly savings to find out how many months it takes for the refinance to pay for itself, and make sure you plan to stay in the home at least that long.

• Is a second mortgage the same as refinancing?

  No, a second mortgage and a refinance are not the same thing. A refinance replaces your current mortgage with a new one, and you’ll still only have a single loan — and a single payment — on the property.

  A second mortgage lets you borrow against the equity you’ve built in your home, with a home equity loan or HELOC, for example, without replacing your existing mortgage. It adds a second monthly payment on top of your current one.

• How soon after closing can I refinance?

  Most loan types require a waiting period, called a seasoning period, before you can refinance. Rate-and-term refinances on conventional, FHA and VA loans generally require six months of on-time payments. If you’re doing a cash-out refinance, expect at least 12 months of seasoning no matter what type of loan you have now. Confirm the exact requirement with the lenders your shopping with before applying.

  Beyond timing, you’ll also need sufficient equity, generally at least 20% for the best rates and terms, though some loan types allow for less. The more equity you have, the more options you’ll have.