A mortgage refinance replaces your existing home loan with a new one — typically to get a lower interest rate, reduce monthly payments, change loan terms, or switch from an adjustable to a fixed rate. You go through a new application and closing process.
When you refinance a mortgage, you pay off your current loan with a brand-new one — ideally on better terms. The new loan can come from your existing lender or any other mortgage lender. Because you're taking out a new mortgage, you go through a full underwriting process again: income verification, credit pull, appraisal, and a new round of closing costs. The CFPB's refinancing guide covers the process and key questions to ask before you start.
Refinancing isn't free. Closing costs typically run 2–5% of the loan amount and include origination fees, title insurance, appraisal, and prepaid items. On a $300,000 refinance, that's $6,000–$15,000 out of pocket (or rolled into the loan). That's why the break-even calculation matters: divide your closing costs by your monthly savings to find how many months it takes to come out ahead. If you plan to sell or move before break-even, refinancing may cost more than it saves.
A rate-and-term refinance changes your interest rate, loan term, or both — you walk away with roughly the same balance. A cash-out refinance lets you borrow more than you owe and take the difference as cash, using your home's equity. The CFPB explains both types and the tradeoffs of each. Cash-out refinances reset your equity position and typically carry slightly higher rates.
Lenders review the same factors as an original purchase mortgage: credit score, income, employment, debt-to-income ratio, and the loan-to-value ratio (your new loan balance divided by the home's current appraised value). If your home has appreciated since your purchase, a lower LTV can qualify you for better terms. If it has declined, you may owe more than the home is worth — a situation that limits your options.