Replacing your existing mortgage with a new one — usually to get a lower rate, change the loan term, or pull cash out of your equity. Comes with new closing costs.
Refinancing is taking out a new mortgage to pay off your existing one. People refinance for three main reasons: to lower the interest rate (and the monthly payment), to change the loan term (shortening to pay off faster, or lengthening to lower payments), or to tap home equity for cash.
A refinance is essentially a new mortgage application: new credit pull, new appraisal, new title work, new closing. Closing costs run roughly 2–3% of the loan amount, just like a purchase. So a refinance has to either save you enough each month to recover those costs (break-even math) or accomplish a clear goal like pulling out cash.
The general rule of thumb: a rate-and-term refi makes sense when you can drop the rate by 0.75–1% or more and you'll stay in the home long enough to recover the closing costs.
Example
You took out a $320K mortgage at 7.25% two years ago. Rates have dropped to 6%. A refinance might cost $7,000 in closing costs and save you $260/month. Break-even: 27 months. If you'll stay in the home 3+ more years, the refi pays for itself.
Also known as
refi, refinance mortgage, mortgage refinance
Source:
CFPB