What Is Refinancing?

Refinancing means replacing your current loan with a new one, usually to get a lower rate, a different term, or cash out. The new loan pays off the old one. Lenders use it for mortgages, auto loans, and student loans. If you’re in distress and renegotiating terms to avoid default, that’s usually called restructuring rather than refinancing.

Reasons to Refinance

• Save on interest: A lower rate can cut total interest. Worth it if you’ll keep the loan long enough to pass break-even after closing costs.
• Lower payment: A longer term or lower rate can reduce the monthly payment. A longer term often means more total interest.
• Shorten the term: Refinancing to a shorter term (e.g. 30 to 15 years) can pay off faster and often at a lower rate, but raises the monthly payment.
• Cash-out: Borrowing more than the payoff amount gives you cash. It increases the new balance and payment; lenders often require enough equity (e.g. 20%).
• Switch rate type: Moving from an ARM to a fixed rate (or the reverse) can lock in or unlock rates depending on expectations.

Costs and Break-Even

Refinancing usually involves closing costs (appraisal, title, origination, etc.) and optional points (a percent of the loan to buy down the rate). Break-even is how many months of monthly savings it takes to offset those costs. If you move or refinance again before break-even, you may not come out ahead.

Frequently Asked Questions

When does refinancing make sense?

When the new rate is low enough to save on interest and you expect to keep the loan past the break-even point. It can also make sense to lower payments, shorten the term, get cash-out, or switch from an ARM to fixed (or vice versa).

What is the break-even on a refinance?

The number of months until your monthly payment savings equal the closing costs. Example: $3,000 in costs and $100/month savings → 30 months. If you sell or refinance before then, you may not recoup the costs.

What costs are involved in refinancing?

Typical costs include application or origination fees, appraisal, title search, recording fees, and optional points (often 1% of the loan). Some can be paid at closing or rolled into the new loan; the calculator uses closing costs for break-even.

What is cash-out refinancing?

Borrowing more than the amount needed to pay off the existing loan. The difference is received in cash. It increases the new loan balance and payment; many lenders require a minimum equity (e.g. 20%) for cash-out.