Refinancing replaces your current mortgage with a new one. People do it to lower the payment, shorten the term, move from an adjustable to a fixed rate, remove mortgage insurance, or take cash out of their equity.
Common reasons to refinance
- Lower the rate and payment. Worth it when the monthly savings pay back the closing costs within the time you plan to keep the loan.
- Shorten the term. Moving from a 30-year to a 15- or 20-year loan raises the payment but can cut the total interest dramatically.
- Fix the rate. Replace an ARM before or after it starts adjusting.
- Drop mortgage insurance. FHA borrowers with 20% equity can refinance into a conventional loan without it.
- Already have an FHA or VA loan? A streamline refinance may skip the appraisal and most of the paperwork.
- Take cash out. See cash-out refinancing.
How to judge it
Divide the total closing costs by the monthly savings to find the break-even in months. If you will keep the loan longer than that, the refinance pays for itself. Also compare the total interest over the remaining life of each loan, because a lower payment over a longer new term can cost more overall. Our refinance calculator shows both.
What it involves
An application, a credit report, income and asset documents, usually an appraisal, and a closing with an escrow company. Most refinances close in 30 to 45 days. You will receive a Loan Estimate within three business days of applying and a Closing Disclosure at least three business days before you sign.