What are good reasons to refinance?
- A lower rate or payment. The most common reason, when today's pricing for your loan is better than what you have.
- A shorter term. Moving from a 30-year to a 15- or 20-year loan can save interest over the life of the loan, usually with a higher monthly payment.
- From adjustable to fixed. Locking in a fixed rate before an adjustable rate resets.
- Dropping Mortgage insurance (PMI or MIP) Insurance that protects the lender on many loans with a smaller down payment. It's added to your payment and can often be removed later. See the full glossary. On many FHA loans the monthly premium lasts for the life of the loan, so refinancing into a conventional loan once you have enough equity can end it. The PMI guide explains the options.
- Cash from your equity. For renovations, tuition or paying off higher-cost debt; see the cash-out guide.
- Removing a borrower. After a divorce or separation, a refinance can take one person off the loan; see the divorce buyout guide.
How do I know if a refinance pays off?
Find your break-even point: divide your total closing costs by how much you'll save each month. The answer is the number of months it takes for the savings to cover the cost. If you plan to stay in the home well past that point, the refinance is likely worth a closer look.
Two cautions. A lower payment can come partly from starting a new 30-year term, which can mean paying more interest overall, so compare total interest too. And rules of thumb about how far rates should fall leave out your own costs and plans. The refinance break-even calculator does the math with your numbers.
What does a refinance cost?
Expect many of the same costs as a purchase loan: an appraisal (sometimes waived), a title search and a new lender's title policy, recording fees, lender charges, and prepaid interest and escrow for the new loan. Your Loan Estimate lists each one.
You can usually pay the costs at closing, add them to the new loan, or take a slightly higher rate in exchange for a lender credit. If your old loan had an Escrow account An account your loan servicer uses to collect and pay your property taxes and homeowners insurance as part of your monthly payment. See the full glossary, the old servicer must refund what's left in it within 20 business days after the loan is paid off, unless you agree to move it to the new loan's escrow.
Which kind of refinance fits?
- Rate-and-term. Changes the rate, the term or both, without taking cash out.
- Cash-out. A larger new loan, with the difference paid to you.
- FHA streamline. For current FHA loans, with less paperwork and often no appraisal; see the FHA streamline guide.
- VA streamline (IRRRL). The VA's Interest Rate Reduction Refinance Loan for current VA loans.
- A home equity line instead. If you like your current rate and only need cash, a HELOC can leave your first mortgage alone; see HELOC vs. cash-out.
When is the right time to refinance?
No one can predict where rates will go, so focus on what you can see: your break-even point, how long you'll stay, and changes in your own situation. A higher credit score, more equity, an adjustable rate nearing its reset or a change in household income can each open better options.
A free mortgage checkup is an easy way to have Tom look at your loan once a year and tell you whether a change makes sense.
What happens when I refinance?
The steps mirror a purchase: you apply, receive a Loan Estimate within three business days, the lender orders an appraisal if one is needed, underwriting reviews your file, and you get a Closing Disclosure A five-page form you receive at least three business days before closing that shows your final loan terms and costs. See the full glossary before you sign.
On a refinance of the home you live in, you have three business days after signing to cancel, so the new loan pays off the old one after that waiting period. Many people feel they skip a payment, but the interest for that month is part of the payoff at closing.
Tools for this topic: Refinance break-even · Payoff calculator
Sources
- CFPB, Loan Estimate explainer
- CFPB, What is the right of rescission?
- Regulation X, 12 CFR 1024.34 (escrow refunds after payoff)
- VA, Interest Rate Reduction Refinance Loan
Checked October 2026. Limits and program rules change, so confirm current figures before you rely on them.
General information only, not tax or legal advice. Program availability, eligibility and terms vary by lender and are subject to change and to underwriting approval. Not a commitment to lend.