What is Refinancing a Mortgage?

Refinancing means replacing your existing mortgage with a new loan, typically to achieve a lower interest rate, change the loan term, or access your home's equity. It restarts your amortization clock and involves many of the same closing costs as your original mortgage, so timing and planning are essential to ensure the financial benefits outweigh the upfront costs.

Rate-and-Term Refinance

A rate-and-term refinance changes your interest rate, loan term, or both, without taking cash out. This is the most common type of refinance. Borrowers typically pursue it when market rates have dropped significantly below their current rate. A general rule of thumb is that refinancing makes sense if you can reduce your rate by at least 0.75–1.0 percentage point and plan to stay in the home long enough to recoup the closing costs through monthly savings.

Cash-Out Refinance

A cash-out refinance replaces your existing loan with a larger one and you receive the difference in cash. Most lenders allow cash-out up to 80% of your home's appraised value (LTV). Investors commonly use cash-out refinances to pull equity from appreciated properties and deploy it into new investments — a core mechanic of the BRRRR strategy. The tradeoff is a higher loan balance and typically a slightly higher interest rate than a rate-and-term refinance.

Calculating Your Break-Even Point

Break-Even Months = Total Closing Costs / Monthly Payment Savings. Refinancing typically costs 2–5% of the loan amount in closing costs. If refinancing saves you $200/month and costs $6,000 in closing costs, your break-even is 30 months. If you sell or refinance again before month 30, you lose money on the transaction. Use the Refinance Calculator to model your specific numbers, including how resetting your loan term affects total interest paid over the life of the loan.

Refinancing and Your Loan Term

Refinancing into a new 30-year loan when you already have 20 years left on your current mortgage resets your amortization and can increase your total lifetime interest cost even if the rate is lower. Consider refinancing into a 15- or 20-year loan to avoid this trap. The Mortgage Calculator makes it easy to compare your remaining payments on the current loan against a new loan term to find the truly optimal outcome.