How to Refinance Your Mortgage

A Simple Step-by-Step Guide

By Soren Hottenstein

Updated March 26, 2025

Refinancing a mortgage means swapping your current home loan for a new one, often with better terms. The goal? Usually, it’s to lock in a lower interest rate, reduce your monthly payment, or even pay off the loan faster by opting for a shorter term. 

But refinancing isn’t just about cutting costs. If your home’s value has increased, you can also use it to access some of the equity you’ve built over time. Before jumping in, though, there are a few key things to consider.

Key Takeaways

• Refinancing replaces your existing mortgage with a new loan, ideally with better terms.
• A lower interest rate can mean reduced monthly payments and significant savings.
• Cash-out refinancing lets you access the equity you’ve built in your home.
• Lenders consider factors like your credit score, income, and loan-to-value (LTV) ratio when determining eligibility.

Understanding Mortgage Refinancing

When you refinance a mortgage, you’re swapping out your current home loan for a new one, either with your existing lender or a different one. Once approved, your old loan is paid off, and you’ll start making payments on the new one instead.

The process is like getting a mortgage the first time, complete with paperwork and closing costs. Freddie Mac estimates that homeowners spend between 3% to 6% of their loan principal to cover refinancing closing costs.1 The key difference? Unlike your original mortgage, no down payment is required when you refinance.

Note

Some lenders let you fold closing costs into your new mortgage, saving you from paying upfront. But there’s a trade-off: Adding these costs to your loan balance means higher monthly payments and a bigger total bill over time.

Benefits of Refinancing a Mortgage

Refinancing a mortgage isn’t a quick process, so weighing the benefits before diving in is important. Homeowners typically refinance for a few key reasons:

• Locking in a lower interest rate
• Reducing monthly payments
• Switching between a fixed and adjustable rate
• Adjusting the loan term to pay off debt sooner or extend repayment
• Tapping into home equity with a cash-out refinance
• Getting rid of private mortgage insurance (PMI)

If saving money is your main goal, you’ll need to calculate your break-even point—when the savings from your new loan outweigh the refinancing costs. Since this can take months or even years, refinancing may not be the best move if you don’t plan on staying in your home long enough to recoup the costs.

For some borrowers, a cash-out refinance is more about accessing cash than lowering monthly payments. This involves taking out a new loan for more than your current balance, with the difference paid out in cash. Remember, though, that a higher loan balance usually means higher monthly payments.

Tip

If you have less than 20% equity, some lenders still offer refinancing options, but you may face higher interest rates, additional fees, or the requirement to carry private mortgage insurance (PMI), which can add to your monthly costs. 

Before going this route, check your loan-to-value (LTV) ratio, or the percentage of your home’s value still tied up in your mortgage. Lenders often limit how much equity you can withdraw based on this number. If refinancing won’t free up as much cash as you need, waiting until you’ve built more equity might be a smarter choice.

Like any mortgage, a cash-out refinance uses your home as collateral. If you fall behind on payments, you risk losing the property—something to keep in mind before borrowing against your home’s value.

How to Refinance Your Mortgage

Refinancing takes some preparation before you even submit an application. Here’s a step-by-step guide to help you through the process.

Check Your Credit

Before applying for a refinance, closely examine your credit score and history. Lenders use these to assess your creditworthiness and determine the rates you qualify for.2 If you haven’t reviewed your credit recently, you can get free copies of your credit reports from the major bureaus at AnnualCreditReport.com.

Checking your reports helps you estimate what kind of refinance rates you might be eligible for. It also allows you to spot and dispute any errors that could be dragging down your score. The top three credit bureaus provide instructions on their websites for correcting inaccuracies.

Important

Your credit score itself isn’t included in your credit report, but it’s based on the information in it. Some credit card issuers offer free access, or you can find your free credit score through various financial websites and services.

Decide What Type of Loan You Want

Refinancing allows you to adjust your mortgage terms to better suit your financial goals. If you have a 30-year loan, consider whether you want to keep the same term or switch to a 15- or 20-year option instead.

A shorter loan term means bigger monthly payments, but it also reduces the total interest you’ll pay over time—and helps you pay off your mortgage faster. Weighing the trade-offs can help you decide what works best for your budget and long-term plans.

Compare Rates and Terms From Different Lenders 

Shopping around for the best refinance rates can help you save a significant amount over the life of your loan. A good starting point is your current lender, but don’t stop there. Consider other banks, credit unions, and online lenders to see who offers the most competitive terms.

When comparing lenders, look beyond the advertised interest rates. Pay attention to:

• Minimum credit score and income requirements
• Loan-to-value ratio requirements, especially for cash-out refinances
• Estimated time to close
• Closing costs and fees
• Loan repayment terms

To get a clearer picture of potential costs and savings, use a mortgage refinance calculator. Comparing results from each can help you accurately gauge how much refinancing at different interest rates might impact your finances.

Tip

Refinancing makes sense if it lowers your rate, reduces payments, or shortens your loan term to save money. It’s less beneficial if costs outweigh savings, you plan to sell soon, or a longer term increases the total interest paid.

Apply for the New Mortgage

Once you’ve picked a lender, it’s time to start the application process. Refinancing involves many of the same steps as getting your original mortgage, so be ready to provide detailed financial information.

Lenders ask for documents like bank statements, pay stubs, and investment account statements to verify your income, assets, and debts. You’ll also likely need a home appraisal, which helps the lender determine the property’s current value before approving the new loan.

If you’re refinancing a government-backed mortgage, such as a Federal Housing Authority (FHA), Veterans Affairs, or U.S. Department of Agriculture loan, you may be able to skip the appraisal. Some of these programs offer streamlined refinancing options that reduce paperwork and speed up the process. And because these loans hav