A practical guide to refinancing your mortgage, covering break-even analysis, rate shopping, required documentation, appraisals, and the differences between cash-out and rate-and-term refinances.
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Break-Even Analysis
Calculate your break-even point in months
Divide total closing costs by your monthly savings. If refinancing costs $4,000 and saves $200/month, your break-even is 20 months. Only refinance if you plan to stay in the home past that point.
List your current monthly payment including principal, interest, taxes, and insurance
Estimate the new payment based on quoted rates
Determine if a rate-and-term or cash-out refinance fits your goals
Rate-and-term refinances get the best rates (typically 0.125-0.25% lower than cash-out). Cash-out refinances let you borrow against your equity but usually require at least 20% equity remaining after the cash withdrawal.
Check your current loan for prepayment penalties
Most conventional loans have no prepayment penalties, but some jumbo and non-QM loans charge 1-3% of the balance if you refinance within 3-5 years. Read your original loan documents or call your servicer.
Rate Shopping
Get rate quotes from at least 3-4 lenders on the same day
Rates change daily. Comparing quotes from the same day gives you an accurate picture. Include your current lender, a credit union, an online lender, and a mortgage broker for the broadest range.
Compare the APR, not just the interest rate
The APR includes the interest rate plus lender fees and points, giving you the true cost of the loan. A 6.0% rate with $5,000 in fees may cost more over time than a 6.125% rate with $1,500 in fees.
Ask each lender about discount points and lender credits
One discount point costs 1% of the loan amount and typically reduces the rate by 0.25%. On a $300,000 loan, one point costs $3,000. Points pay off only if you keep the loan long enough to recoup the upfront cost.
Lock your rate once you find a competitive offer
Standard rate locks last 30-45 days at no cost. Extended locks of 60-90 days may add 0.125-0.25% to the rate. Lock when you're satisfied with the rate, since timing the market rarely works.
Application Documents
Gather your 2 most recent pay stubs
Pay stubs must be within 30 days of your application date. If you're salaried, two stubs are enough. Commission and bonus earners may need 6-12 months of stubs to show income consistency.
Collect W-2s and tax returns from the past 2 years
Self-employed borrowers need 2 full years of personal and business tax returns. Lenders average your net income over 24 months—a big drop in the most recent year will reduce your qualifying income.
Pull bank statements from the last 2 months for all accounts
Lenders review bank statements to verify assets and look for large deposits. Any deposit over $500 that isn't a paycheck deposit will need a written explanation and paper trail.
Get your current mortgage statement showing the payoff amount
The payoff amount differs from your balance because it includes per-diem interest through the expected payoff date. Request a formal payoff quote from your current servicer—it's valid for 10-30 days.
Provide your current homeowner's insurance policy declarations page
The declarations page shows your coverage amounts, deductibles, and annual premium. Your new lender needs this to set up the escrow account and verify adequate coverage.
Appraisal
Schedule the home appraisal ordered by the lender
Appraisals cost $350-$600 and are paid upfront by the borrower. The appraiser visits your home for 30-60 minutes. Results typically come back within 5-10 business days.
Clean and declutter your home before the appraiser's visit
Prepare a list of improvements made since purchase with costs
Review the appraisal report for accuracy
Check the square footage, bedroom/bathroom count, and comparable sales used. Errors in these fields directly affect the appraised value. You can dispute factual errors with documentation.
Know your options if the appraisal comes in low
If the appraisal is below the amount needed for your refinance, you can challenge it with better comps, pay for a second appraisal ($350-$600 again), or adjust the loan amount downward.
Closing the Refinance
Review the Closing Disclosure 3 business days before closing
Compare the final numbers to your Loan Estimate. Closing costs for a refinance typically run $2,000-$6,000, or 1.5-2% of the loan amount. Question any fee that increased by more than 10%.
Decide whether to roll closing costs into the loan or pay out of pocket
Rolling $4,000 in closing costs into a $300,000 loan at 6% adds about $24/month and costs $8,600 in extra interest over 30 years. Paying cash upfront saves you that interest.
Sign refinance documents and confirm the 3-day right of rescission period
Federal law gives you 3 business days after signing to cancel a refinance with no penalty. The new loan doesn't fund until this period expires. Sundays and federal holidays don't count as business days.
Confirm your old loan is paid off within 30 days
Check your old lender's portal 2-4 weeks after closing to verify a $0 balance. You should receive a payoff confirmation letter within 30 days. Keep this letter for your records.
Frequently Asked Questions
When does it make financial sense to refinance my mortgage?
The traditional rule is to refinance when you can lower your rate by at least 0.75-1%, but the real calculation depends on your break-even point: divide total closing costs by monthly payment savings to find how many months until the refinance pays for itself. If your break-even is 18-24 months and you plan to stay in the home for 5+ more years, refinancing is typically worthwhile. Cash-out refinancing to consolidate higher-interest debt (credit cards at 20%+ into a mortgage at 6-7%) can save thousands annually even without a rate reduction on the existing mortgage.
How much does it cost to refinance a mortgage?
Refinancing closing costs run 2-5% of the loan amount — on a $300,000 mortgage, expect $6,000-$15,000 in fees including appraisal ($350-$600), title search and insurance ($500-$1,500), lender origination fees (0.5-1% of the loan), and recording fees. "No-closing-cost" refinances roll these fees into the loan balance or charge a slightly higher interest rate, which costs more over the full loan term but eliminates out-of-pocket expense. Shopping at least three lenders and negotiating the origination fee can save $1,000-$3,000 on refinancing costs.
Can I refinance if my home value has dropped?
If you owe more than your home is currently worth ("underwater"), conventional refinancing requires adequate equity, which means you may not qualify. The FHFA's High Loan-to-Value Refinance Option allows homeowners with Fannie Mae or Freddie Mac-backed loans to refinance even with limited or negative equity if they're current on payments. FHA Streamline refinances allow existing FHA borrowers to refinance without a new appraisal, bypassing the home value question entirely — you only need to demonstrate a "net tangible benefit" (lower payment or switching from adjustable to fixed rate).
Should I refinance to a 15-year or 30-year mortgage?
A 15-year mortgage saves 50-60% in total interest compared to a 30-year but increases your monthly payment by 30-40%. On a $300,000 loan at 6.5% (30-year) vs 6.0% (15-year), the monthly payment jumps from $1,896 to $2,532, but you save $193,000 in total interest and own the home outright 15 years sooner. If the higher payment strains your budget, consider a 30-year mortgage with voluntary extra principal payments — this gives you the flexibility of a lower required payment while still allowing you to pay off early if finances allow.