what is refinancing a mortgage and how it works

Definition and purpose

Refinancing a mortgage means replacing your existing home loan with a new one. Homeowners do it to secure a lower interest rate, change the repayment term, switch from an adjustable to a fixed rate (or vice versa), or access equity through a cash‑out refinance. By resetting the loan, you can reshape monthly payments and total interest over time.

How the process unfolds

Typical steps include reviewing credit and equity, shopping multiple lenders, estimating a break‑even point, submitting an application, underwriting and appraisal, then closing. At closing, the new lender pays off the old loan, and you begin payments under new terms. Expect closing costs and points.

Common reasons to refinance

• Lower your monthly payment with a reduced rate or longer term.
• Shorten the term to pay off faster and save on interest.
• Tap home equity via a cash‑out refinance.
• Remove PMI after reaching sufficient equity.
• Consolidate higher‑interest debt-used carefully.

Costs and timing

Refinancing often costs 2–5% of the loan amount. It makes sense when savings exceed fees within your planned time in the home. Watch prepayment penalties, rate locks, and the risk of extending your payoff timeline.