How to Refinance Your Mortgage
Refinancing your mortgage means replacing your current home loan with a new one, ideally with better terms. When done at the right time, refinancing can save tens of thousands of dollars over the life of your loan.
When Does Refinancing Make Sense?
- Interest rates have dropped — a rate reduction of 0.75% or more often justifies the costs
- Your credit score has improved — a higher score qualifies you for better rates
- You want to change your loan term — switching from 30-year to 15-year builds equity faster
- You need to remove PMI — if your home has appreciated enough to reach 20% equity
- You want to switch from adjustable to fixed rate
The Break-Even Calculation
Closing costs typically run 2-5% of the loan amount. Calculate: Break-even = Closing costs / Monthly savings
If refinancing costs $6,000 and saves $200/month, your break-even is 30 months. If you'll stay longer, refinancing is likely worth it.
Step-by-Step Process
1. Check Your Credit and Equity
Most lenders require a credit score of at least 620 for conventional refinancing, though 740+ gets the best rates. You'll need at least 20% equity to avoid PMI.
2. Shop Multiple Lenders
Get quotes from at least three sources: your current servicer, a local credit union, and an online lender. All mortgage inquiries within a 14-45 day window count as a single credit inquiry.
3. Compare Loan Estimates
Compare interest rate, APR, monthly payment, total closing costs, and loan term side by side.
4. Lock Your Rate
Rate locks typically last 30-60 days. If closing takes longer, you may need to pay for an extension.
5. Appraisal and Underwriting
Have pay stubs, W-2s, tax returns, bank statements, and your current mortgage statement ready.
6. Close on Your New Loan
Review the Closing Disclosure against your original Loan Estimate. Sign paperwork and pay closing costs.
Common Mistakes
- Resetting to a 30-year term — extends your debt by a decade if you're already years in
- Cash-out refinancing for non-essentials — converts short-term spending into 30 years of payments
- Ignoring closing costs — a lower rate doesn't save money if you don't stay long enough
- Not shopping around — even 0.25% costs thousands over the loan's life
The Bottom Line
Refinancing is one of the most impactful financial moves homeowners can make when the timing is right. Run the break-even calculation, shop multiple lenders, and make sure the math works for your situation.
