Calculate refinancing savings, break-even period, and total costs. Compare your current mortgage with new refinancing options including rate-and-term and cash-out refinancing.
Mortgage refinancing involves taking out a new loan to pay off your existing mortgage, ideally with better terms such as a lower interest rate, different loan term, or access to cash through your home's equity. Refinancing can save money, provide access to cash, or help you pay off your mortgage faster.
The decision to refinance should be based on careful analysis of costs versus benefits. While a lower interest rate is attractive, you must consider closing costs, how long you plan to stay in the home, and your overall financial goals to determine if refinancing makes financial sense.
Most common type - typically to secure lower rate or change loan term
Access home equity for home improvements, debt consolidation, or other needs
Bring cash to closing to reduce loan balance or eliminate PMI
| Refinance Type | Best For | Typical Requirements | Key Benefit |
|---|---|---|---|
| Rate & Term | Lower rates available | Good credit, stable income | Lower monthly payment |
| Cash-Out | Need access to equity | Significant equity, good credit | Access to cash |
| FHA Streamline | Current FHA borrowers | Current on payments | Minimal documentation |
| VA IRRRL | Current VA borrowers | Eligible veterans | No appraisal needed |
Break-Even Period: Time it takes for monthly savings to equal closing costs
Calculation: Closing Costs ÷ Monthly Savings = Break-Even Period (months)
Rule of Thumb: If you'll stay in the home longer than the break-even period, refinancing likely makes sense
| Monthly Savings | $5,000 Closing Costs | $7,500 Closing Costs | $10,000 Closing Costs |
|---|---|---|---|
| $100 | 50 months | 75 months | 100 months |
| $200 | 25 months | 38 months | 50 months |
| $300 | 17 months | 25 months | 33 months |
| $400 | 13 months | 19 months | 25 months |
| Cost Type | Typical Range | Description |
|---|---|---|
| Application Fee | $300-$500 | Processing and credit check |
| Appraisal | $400-$800 | Current home value assessment |
| Origination Fee | 0.5-1% of loan | Lender fee for processing loan |
| Title Insurance | $500-$1,500 | Protects against title issues |
| Attorney Fees | $500-$1,500 | Legal document preparation |
| Recording Fees | $50-$500 | Government filing fees |
| Total Closing Costs | 2-5% of loan | All fees combined |
Credit Score: Typically 620+ for conventional loans, higher scores get better rates
Debt-to-Income Ratio: Usually 43% or lower, including new mortgage payment
Employment History: Stable employment for at least 2 years
Home Equity: At least 20% equity for best rates, 5-10% minimum for many programs
Income Documentation: W-2s, pay stubs, tax returns, bank statements
Some programs allow up to 90% LTV for qualified borrowers
| Loan Type | Max Cash-Out LTV | Credit Score Required | Special Features |
|---|---|---|---|
| Conventional | 80% | 620+ | Best rates available |
| FHA | 80% | 580+ | Lower credit requirements |
| VA | 100% | No minimum | No cash-out limits for eligible veterans |
| USDA | 80% | 640+ | Rural properties only |
Application (Day 1): Submit application with required documentation
Processing (Days 1-20): Lender reviews application, orders appraisal
Underwriting (Days 20-35): Detailed review of financials and property
Clear to Close (Days 35-45): Final approval and closing preparation
Closing (Day 45): Sign documents and fund new loan
Right of Rescission: 3-day cancellation period after closing
Only Looking at Rate: Consider total costs, not just interest rate
Ignoring Closing Costs: High fees can negate interest savings
Resetting Loan Term: Starting over on 30-year loan increases total interest
Taking Cash for Non-Essentials: Home equity isn't free money
Not Shopping Around: Rates and fees vary significantly between lenders
May be option if experiencing financial hardship
Variable rate second mortgage for ongoing credit needs
Fixed rate and payment for specific amount of cash