What Is Refinancing?
Replacing your existing mortgage with a new one, typically to get a lower rate or change the loan term.
Definition
Refinancing means paying off your current mortgage with a brand-new loan, usually from a different lender. The two main types are rate-and-term refi (you change the rate, the term, or both, but take no cash out) and cash-out refi (you borrow more than you owe and pocket the difference). A rate-and-term refi makes sense when market rates have dropped at least 0.5-1% below your current rate and you plan to stay long enough to break even on closing costs. The break-even period is closing costs divided by the monthly savings on your payment. Refinancing restarts your amortization clock, so moving from year 10 of a 30-year loan into a new 30-year loan can increase total interest even at a lower rate.
Example
You have a $280,000 balance at 7.5%. Refinancing to 6.25% drops your monthly payment by $210. With $5,000 in closing costs, break-even is 24 months.