Refinancing
Replacing an existing loan with a new loan, typically to obtain a lower interest rate or different loan terms.
What is Refinancing?
Refinancing is the process of replacing an existing loan — most commonly a mortgage — with a new loan that has different terms, usually to reduce the interest rate, lower monthly payments, shorten the loan term, or tap home equity (cash-out refinancing). A rate-and-term refinance changes the interest rate and/or loan duration without extracting equity. A cash-out refinance borrows more than the current balance, giving the homeowner access to equity as cash. The break-even period — the time it takes for monthly savings to exceed upfront closing costs (typically 2–5% of the loan balance) — is the primary decision metric for whether refinancing makes financial sense.
Example
A homeowner with a $350,000 balance at 7.5% refinances to 6.0%. Monthly savings on principal and interest: $340/month. Closing costs: $7,000. Break-even: $7,000 ÷ $340 = 20.6 months. If the homeowner plans to stay more than 21 months, refinancing makes financial sense.