Refinancing replaces your existing mortgage with a new one, typically to secure a lower interest rate, change the loan term, or access home equity through a cash-out refinance.
The most common reason to refinance is a meaningful drop in interest rates since your original loan – even a 0.5-1% reduction can produce significant savings over the life of a large loan.
Refinancing comes with closing costs, often 2-5% of the loan amount, so it’s worth calculating the ‘break-even point’ – how many months of savings it takes to recoup those costs – before proceeding.
If you’re planning to sell or move before reaching that break-even point, refinancing likely won’t pay off, even if the new rate looks attractive on paper.
Refinancing to a shorter loan term can also make sense for building equity faster and paying less total interest, even if the monthly payment doesn’t drop significantly.