Refinance

Refinance is the process of replacing an existing loan with a new loan under different terms. It is most common with mortgages but can apply to auto loans, student loans, and other debts. The new loan pays off the old one, and the borrower owes the new lender.

People refinance to obtain a lower interest rate, reduce monthly payments, switch from an adjustable-rate to a fixed-rate loan, shorten or extend the loan term, or tap home equity through a cash-out refinance to fund expenses or consolidate debt. Cash-out refinances also allow borrowers to increase the loan amount and take cash at closing.

The refinancing process typically involves evaluating current loan terms, credit and income, and debt-to-income ratio. Borrowers shop offers from lenders, gather documents (income, assets, tax returns), and receive a loan estimate. After underwriting, an appraisal and title work may be required. If approved, closing occurs, the old loan is paid off, and the new loan replaces it. The loan-to-value ratio and prevailing market conditions influence eligibility and pricing.

Costs associated with refinancing include closing costs, which commonly range from about 2% to 5% of the loan amount, and points paid to obtain a lower rate. A break-even analysis compares monthly savings to upfront costs. Considerations include potential changes in the loan term, total interest paid over the life of the loan, and the impact on credit scores.