Refinance

A refinance is a new mortgage that pays off the existing mortgage on the same property. The borrower pays closing costs (typically 2–5% of the new loan amount) and receives a new rate, term, or loan structure in exchange. There's no transfer of ownership, the property stays with the same owner, just with a different loan against it.

How it works: a rate-and-term refinance keeps the same loan amount and changes only the rate or term. A cash-out refinance increases the loan amount, with the borrower receiving the difference in cash at closing. Streamlined refinance products (FHA Streamline, VA IRRRL, USDA streamline) skip parts of the underwriting process for borrowers refinancing within the same loan program.

Why it matters: the math is a break-even calculation. The monthly savings from the new loan have to exceed the closing costs over the period the borrower expects to keep the new loan. On a $400,000 loan with $5,000 in closing costs, a 0.50% rate drop saves about $115/month, producing a 43-month break-even. A 1.0% drop produces a 20-month break-even. Borrowers who'll move before the break-even date lose money on the refinance.

Common gotcha: refinancing resets the amortization schedule. A borrower five years into a 30-year mortgage who refinances into a new 30-year is now back at the start of an amortization curve, early years mostly interest. The monthly payment goes down, but total interest paid across the original mortgage plus the new one can be higher than just keeping the original loan. Shorter-term refinances (into a 20-year or 15-year) avoid this trap but raise the monthly payment.