Refinance your mortgage and save money

Refinancing replaces your current mortgage with a new one, usually to secure a lower interest rate, shorten your loan term, or adjust your monthly payment. The process is similar to your original home purchase. A lender evaluates your credit, income, and home value to determine your eligibility for new terms.

Once approved, the new loan pays off your old mortgage balance in full. While this can save you money over time, it is not free. You will need to pay closing costs, which typically range between 2% and 5% of the loan amount.

To refinance your mortgage, you follow a process very similar to when you first bought your home:

• Shop for lenders: Research and compare interest rates and loan terms from several different financial institutions. Since rates and fees vary significantly between banks and credit unions, getting multiple quotes is the best way to ensure you are getting a competitive deal.
• Apply and lock your rate: Once you choose a lender, you will submit a formal application and provide financial documentation, such as tax returns and pay stubs. You can often lock in your interest rate at this stage to prevent it from increasing while your loan is being processed.
• Appraisal and closing: The lender will typically order a professional appraisal to verify the current market value of your home. If the value supports the loan amount, you will attend a closing to sign your new loan documents and pay any applicable closing costs.

To qualify for a mortgage refinance, you must demonstrate that you are financially stable and that your home still carries sufficient value. Key requirements generally include:

• Credit health: Most conventional lenders require a minimum credit score of 620. However, borrowers with scores of 740 or higher typically unlock the lowest available interest rates, which is often the primary goal of refinancing.
• Equity position: Equity is the difference between your home’s value and your loan balance. While some programs allow for lower amounts, reaching 20% equity allows you to refinance without paying for private mortgage insurance.
• Debt-to-income (DTI) ratio: This measures your monthly debt payments against your gross monthly income. Most lenders prefer a DTI ratio of 45% or lower to ensure you can comfortably afford the new loan payments.
• Waiting periods: Often called seasoning requirements, many lenders require you to wait at least six months after your original closing before you can refinance the same property.

Deciding when to refinance depends on your current rate and how long you’ll keep the home. Generally, it is beneficial if you can lower your interest rate by 0.75% to 1%. Refinancing is most advantageous if you stay long enough to reach the "break-even point," where monthly savings exceed the upfront costs. Since closing fees typically range from 2% to 5% of the loan, you’ll want to ensure the long-term savings outweigh initial expenses.

There are several ways to restructure your home loan, each designed to meet a specific financial goal. Most homeowners choose between three main categories:

• Rate-and-term refinance: This replaces your existing mortgage with a new one to secure a lower interest rate or change the length of the loan. For example, moving from a 30-year to a 15-year term can save you thousands in interest.
• Cash-out refinance: You take out a loan for more than you owe and receive the difference in cash. Many lenders typically cap these loans at 80% of your home's total value to ensure you maintain a safety buffer of equity.
• Cash-in refinance: You pay a lump sum toward your principal during the refinance. This is often used to lower the monthly payment or reach the 20% equity mark to eliminate the private mortgage insurance requirement.

Homeowners typically refinance to improve their financial position by securing a lower interest rate, which reduces monthly payments. This is also an effective way to shorten a loan term — moving from a 30-year to a 15-year mortgage — to build equity faster and save on total interest.

Refinancing a mortgage typically costs between 2% and 5% of the new loan amount. These fees cover the application, home appraisal, title search, and lender origination charges. For example, for a $300,000 mortgage, you can expect to pay between $6,000 and $15,000 upfront.