Mortgage Refinance: When and How to Refinance

Refinancing costs 2-5% of the loan amount in closing costs (3,000-10,000 USD on a 200,000 USD loan). Divide closing costs by monthly savings to find your break-even point. Example: 6,000 USD in closing costs divided by 200 USD monthly savings equals 30 months. If you plan to stay in your home longer than 30 months, refinancing makes sense. If you might move in 2 years, the math does not work. The traditional rule of thumb (refinance when rates drop 1% or more) is oversimplified. Run the break-even calculation with actual quotes, because a 0.5% rate drop with low closing costs can beat a 1% drop with high fees.

Rate-and-term refinance: changes your interest rate, loan term, or both without changing the loan amount. This is the most common type and the focus of this guide. Cash-out refinance: replaces your mortgage with a larger one and gives you the difference in cash (useful for renovations or debt consolidation, but increases your loan balance and usually has a slightly higher rate, typically 0.125-0.25% above rate-and-term). Streamline refinance: simplified process for FHA, VA, and USDA loans with reduced documentation and no appraisal requirement (if available, this is usually the fastest and cheapest option).

Refinancing from a 30-year to a 15-year mortgage typically saves 100,000-200,000 USD in total interest on a 300,000 USD loan. The monthly payment increases (typically by 30-40%), but every dollar goes more toward principal. Example: 300,000 USD at 7% for 30 years costs 418,527 USD in total interest with a 1,996 USD monthly payment. The same loan at 6.25% for 15 years costs 162,710 USD in total interest with a 2,572 USD monthly payment. You pay 576 USD more per month but save 255,817 USD overall. Only shorten the term if the higher payment fits comfortably in your budget.

Mortgage rates change daily, so comparing quotes from different days is misleading. Contact 3-5 lenders on the same day: your current lender (they may offer loyalty discounts or waive fees to retain you), a credit union (typically offer rates 0.25-0.5% below banks), a large bank, an online lender (Rocket Mortgage, Better, SoFi), and a local mortgage broker who shops multiple wholesale lenders. Each rate quote should include: interest rate, APR (includes fees), points, closing costs, and lock period. Multiple mortgage inquiries within a 14-45 day window count as a single hard inquiry on your credit report.

Discount points let you buy down your rate (1 point costs 1% of the loan amount and typically reduces the rate by 0.25%). On a 300,000 USD loan, 1 point costs 3,000 USD. If it reduces your rate by 0.25%, your monthly savings are roughly 45 USD, so the break-even is 67 months (about 5.5 years). Points make sense if you will keep the loan 7+ years. Lender credits work in reverse: the lender gives you money toward closing costs in exchange for a higher rate (typically 0.125-0.25% higher per 1,000 USD in credits). Credits make sense if you might refinance again within 3-5 years or want to minimize upfront costs.

A rate lock guarantees your quoted rate for a specified period (typically 30, 45, or 60 days). Longer locks may cost slightly more (0.125-0.25% in fee). Lock as soon as you have chosen a lender, because rates can rise at any time. If your lock expires before closing (common if the appraisal or underwriting takes longer than expected), you may need to pay a lock extension fee (0.125-0.375% of the loan amount) or accept the current market rate. Ask your lender about float-down options that allow you to take a lower rate if rates drop after you lock (some lenders offer this for a small fee).

Standard refinance documentation: last 2 years of W-2s or 1099s, last 2 years of federal tax returns (all pages), last 30 days of pay stubs, last 2-3 months of bank statements (all pages, all accounts), current mortgage statement, homeowners insurance declaration page, most recent property tax bill, and government-issued photo ID. Self-employed borrowers also need: year-to-date profit and loss statement, business tax returns (2 years), and possibly a CPA letter. Missing documents are the number one cause of refinance delays. Gather everything before starting the application.

Pull your free credit report from annualcreditreport.com and check for errors, delinquencies, or high balances. Minimum score requirements: conventional refinance (620, but 740+ gets the best rates), FHA streamline (580), VA streamline (no minimum, but most lenders require 620). Every 20-point increase above 680 can reduce your rate by 0.125-0.25%. Quick score improvements: pay down credit card balances below 30% utilization (below 10% is ideal), dispute any errors on your report (correcting an error can boost scores 20-100 points), and do not open new credit accounts or make large purchases in the 3-6 months before refinancing.

Most refinances require an appraisal (400-700 USD, ordered by the lender). A higher appraisal means more equity and potentially better loan terms. Before the appraiser visits: complete any deferred maintenance (fix leaks, patch holes, replace broken fixtures), clean and declutter (appraisers note the home's condition), ensure all systems work (HVAC, appliances, plumbing), and improve curb appeal (trim landscaping, clean exterior). Provide the appraiser with a list of improvements you have made and comparable recent sales in your neighborhood (your real estate agent can help compile these). The appraisal typically takes 1-2 weeks to complete after ordering.

After you submit your application, the underwriter reviews your financials and will likely request additional documentation (called conditions). Common conditions: letter of explanation for large deposits or withdrawals, updated pay stub, proof of employment (verbal verification with your employer), and additional bank statements. Every day you delay responding adds a day (or more) to your closing timeline. Set up email and phone notifications from your lender and respond to every request within 24-48 hours. The fastest refinances close in 21 days. Delays in providing documents can push closing to 45-60 days.

Federal law requires lenders to provide a Closing Disclosure (CD) at least 3 business days before closing. Compare the CD to the Loan Estimate you received when you applied. Key items to verify: interest rate and monthly payment match what you locked, closing costs are within 10% of the original estimate (lender fees should not change at all), loan amount is correct, and there are no unexpected fees. If anything looks wrong, contact your loan officer immediately. You have the right to delay closing until discrepancies are resolved. Do not sign documents with numbers you do not understand.

After closing, your old lender must be paid off within 2-3 business days. You typically skip one month's payment during the transition (this is not a free month; the interest is rolled into the new loan). Your first new payment is usually due 30-60 days after closing. Set up autopay with your new lender immediately to avoid missing the first payment. Cancel autopay with your old lender after confirming the payoff is complete (check your old lender's website or call to verify a zero balance). A missed first payment on a new loan damages your credit score significantly.