How to Refinance Your Mortgage
Refinancing replaces your current mortgage with a new one. Refinance when rates drop 0.75 percent or more and you will stay long enough to recoup closing costs.
Refinancing replaces your current mortgage with a new one. Refinance when the new rate is at least 0.75 percent lower than your current rate and you will own the home long enough to recoup closing costs (usually 2 to 5 percent of the loan amount). Standard refinances close in 30 to 45 days. Use a break-even calculation, not gut feel, to decide.
When a Refinance Actually Makes Sense
The classic rule was a 1 percent rate drop. That rule was built when closing costs were lower and loan balances were smaller. The right test in 2026 is the break-even point:
Break-even months = Total closing costs / Monthly payment savings
Example. You have a $350,000 loan at 7.25 percent. A new 30-year loan at 6.25 percent saves $233 per month. Closing costs are $6,500. Break-even is 6,500 / 233 = 28 months. If you plan to stay in the home for more than 2 years and 4 months, the refinance wins.
Use the refinance break-even calculator to plug in your real numbers.
A refinance also makes sense in three non-rate scenarios:
- Remove PMI by refinancing once your loan-to-value ratio drops below 80 percent and PMI is not auto-cancelable on your current loan
- Remove a co-borrower after a divorce or relationship change
- Shorten the term from a 30-year to a 15-year or 20-year, capturing the lower 15-year rate spread
The Two Types of Refinance
Rate-and-Term Refinance
The new loan balance equals the old loan balance (plus rolled-in closing costs, if any). You change the rate, the term, or both. No cash to the borrower at closing. This is the most common refinance and gets the lowest rate.
Cash-Out Refinance
The new loan balance is larger than the old balance. You get the difference as cash. Most lenders cap cash-out LTV at 80 percent on a primary residence. The rate is usually 0.25 to 0.5 percent higher than a rate-and-term, and closing costs run higher too.
Use cash-out to consolidate high-interest debt, fund a major home renovation, or pay for education. Do not use cash-out for vehicles, vacations, or to buy investments. You are converting unsecured short-term debt into 30-year debt secured by your home.
For more on the tradeoffs, see our cash-out refinance hub and the HELOC alternative, which is often cheaper for short-term borrowing.
Step 1: Pull Your Current Loan Numbers
Before you call any lender, get four numbers from your current loan:
| Number | Where to find it | |---|---| | Current rate (note rate) | Your original closing documents or servicer dashboard | | Current balance | Servicer payoff statement (not the app, which lags) | | Remaining term | Servicer dashboard | | Prepayment penalty (if any) | Original promissory note |
Loans originated after January 2014 cannot have prepayment penalties on most consumer mortgages, per CFPB Qualified Mortgage rules. Older loans, subprime loans, and some investment property loans may still carry them. Verify before you proceed.
Step 2: Apply With 3 Lenders Inside 14 Days
Refinance shopping works the same as purchase shopping. Pick at least 3 lenders, ideally from different categories: one big bank (Chase, Wells Fargo), one online lender (Better, Rocket), one credit union or LoanDepot-style direct lender.
The FICO scoring model treats all mortgage inquiries within a 14-day window as a single inquiry. Use that window. Get a formal Loan Estimate from each lender.
Compare:
- APR (note rate plus all finance charges)
- Total cash to close (or cash back, on a no-cost refinance)
- Lender fees (origination, processing, underwriting)
- Days to close
See our breakdown on how to compare mortgage offers for which line items actually matter.
Step 3: Decide the Term
When you refinance, you can change the term. The two common decisions:
Refinance from 30-year into another 30-year. Lowest monthly payment, longest payoff. Best if you need the cash flow or you bought the house recently.
Refinance from 30-year into a 15-year or 20-year. Higher monthly payment, much lower lifetime interest. Best if you are 5-plus years into your original 30-year and want to keep your original payoff date while capturing a lower rate.
Example. You have 25 years left on a 30-year at 7.25 percent. Refinancing into another 30-year at 6.25 percent extends the payoff by 5 years and adds tens of thousands in interest over the life of the loan, even at a lower rate. Refinancing into a 25-year at 6.25 percent keeps the timeline and saves all the interest.
See the 15-year fixed hub and 30-year fixed hub for the rate spread between the two.
Step 4: Streamline Refinance Programs
Government-backed loans have streamline refinance programs that skip the appraisal, skip most income verification, and close faster.
FHA Streamline Refinance. Available if you have an FHA loan, you are current on payments, and the new loan lowers your payment by at least 5 percent. No new appraisal, no DTI calculation. Closing in 21 to 30 days.
VA Interest Rate Reduction Refinance Loan (IRRRL). Available if you have a VA loan, you are current on payments, and the new loan lowers your rate. No appraisal, no income verification, no funding fee for disabled veterans. Closes in 21 to 30 days.
USDA Streamline Refinance. Similar to FHA Streamline for USDA loans. Available in eligible rural areas only.
Both FHA Streamline and VA IRRRL allow you to refinance regardless of how much your home value has dropped. They are the best option for underwater or near-underwater borrowers with FHA or VA loans.
Step 5: Lock the Rate and Submit Documents
Once you accept an offer, lock the rate. A 30-day lock is usually free. 45 and 60-day locks add 0.125 to 0.25 percent.
Upload the standard refinance document stack:
- Two most recent pay stubs
- Last 2 years of W-2s or 1099s
- Last 2 months of bank statements (all accounts)
- Last 2 years of federal tax returns
- Most recent mortgage statement
- Homeowners insurance declarations page
- Photo ID
The lender orders an appraisal (usually $500 to $700, paid up front). Underwriting takes 15 to 30 days for a standard refinance.
Step 6: Close and the 3-Day Right of Rescission
You sign closing documents at a title company, attorney's office, or with a mobile notary. On a primary residence refinance, federal law gives you 3 business days after signing to cancel for any reason (the right of rescission). The new loan does not fund until that window closes.
After funding, the new loan pays off the old loan directly. Your next mortgage payment is to the new servicer. Watch your account for a refund of escrow from the old servicer (usually 30 to 45 days after payoff).
No-Closing-Cost Refinance: The Catch
A no-closing-cost refinance does not mean free. The lender either rolls the closing costs into the loan balance (you pay them over 30 years with interest) or rebates the costs at closing in exchange for a higher rate (usually 0.25 to 0.5 percent higher).
Run both options through the break-even calculator. The no-cost option usually wins if you will sell or refinance again within 5 years. The paid-cost option wins for long-term holders.
When NOT to Refinance
- You will move in less than 18 months
- Your current rate is within 0.5 percent of the new rate
- Your credit score has dropped since your original loan (your new rate may be worse)
- You are close to paying off the loan and a refinance resets the amortization
- You are refinancing only to consolidate small credit card balances (use a HELOC or balance transfer instead)
What to Do Next
If you have already gathered numbers, get 3 Loan Estimates this week. If you are not sure, run your scenario through the refinance break-even calculator first.
If you are refinancing to remove PMI specifically, read how to remove PMI from your mortgage for cheaper alternatives. If you are looking at cash-out, compare against a HELOC before committing.
Citations
- Consumer Financial Protection Bureau, refinance guide: https://www.consumerfinance.gov/
- Freddie Mac Primary Mortgage Market Survey: https://www.freddiemac.com/pmms
- HUD, FHA Streamline Refinance: https://www.hud.gov/
- VA, Interest Rate Reduction Refinance Loan: https://www.va.gov/housing-assistance/home-loans/
FHA loans require 3.5 percent down with a 580 credit score, or 10 percent with 500. Apply through any FHA-approved lender. The full process takes 30 to 45 days.
VA loans and USDA loans allow 0 percent down for eligible buyers. Down payment assistance programs can cover the rest. Closing costs still apply but are often negotiable.
Compare 3 lenders across rate, APR, lender fees, and closing speed. The right pick saves $5,000 to $20,000 over a 30-year loan, not just the lowest advertised rate.
Compare Loan Estimates side by side using APR, total cash to close, lender fees, and 5-year cost. The lowest rate is rarely the cheapest loan.
A pre-approval verifies your income, credit, and assets so sellers take you seriously. Apply with 2 to 3 lenders within 14 days to protect your credit score.
Lower your mortgage payment by refinancing, recasting, removing PMI, appealing taxes, or shopping insurance. Each lever saves $50 to $400 per month.
Pay biweekly, add 1/12 of your payment monthly, recast after lump sums, or refinance to 15 years. Each cuts 4 to 15 years and saves $30,000 to $150,000 in interest.
VA loans require eligible military service, a 580 to 620 credit score from most lenders, and a Certificate of Eligibility. Zero down payment and no PMI.
Cancel PMI by requesting it at 80 percent LTV with an appraisal, waiting for auto-cancellation at 78 percent, or refinancing into a non-PMI loan. Saves $50 to $300 per month.
Step-by-step guides to pre-approval, refinance, PMI, and getting the lowest rate.