Refinance what is

Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.

I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Refinancing A Home Refinance a Home. Home Ownership Refinancing A Home. What Is a Refinance? Key Takeaways A refinance occurs when the terms of an existing loan, such as interest rates, payment schedules, or other terms, are revised. Borrowers tend to refinance when interest rates fall. Consumer loans often considered for refinancing include mortgage loans, car loans, and student loans.

Pros You can get a lower monthly mortgage payment and interest rate. You can acquire an influx of cash for a pressing financial need. You can set a shorter loan term, allowing you to save money on total interest paid.

Cons If your loan term is reset to its original length, your total interest payment over the life of the loan may outweigh what you save at the lower rate.

If rates have fallen sharply and many homeowners are rushing to refinance at the same time, it may take days or longer to close.

Refinance lenders normally need to verify your income, assets, and credit history. But some refinance programs let you bypass this verification process. These programs are called Streamline Refinances.

Although different lenders may set their own requirements sometimes including appraisals and credit approval , the general guidelines for Streamline Refinancing are as follows. This refinance program waives credit and income verification and does not require a home appraisal.

FHA refinance rates are generally low. But homeowners will have to pay for upfront mortgage insurance and annual mortgage insurance premiums MIP , just like with an FHA home purchase loan.

These added costs will impact your refinance savings. To qualify for the FHA Streamline program, you must have a history of on-time mortgage payments. FHA does back a cash-out refinance loan , but it requires full underwriting and typically has higher credit score requirements.

Refinancing VA homeowners are required to show the refinance mortgage will result in monthly payment savings, except for homeowners changing to a shorter loan term, such as from a year loan to a year loan; or, from an adjustable-rate mortgage to a fixed-rate loan. And homeowners using the program to refinance are limited to year fixed-rate mortgages; ARMs are not allowed.

The HIRO program also requires borrowers to have six months of on-time monthly payments on their current loan and no more than one late payment in the past year. Getting a new loan with a shorter term or a lower interest rate should save you money. However, these savings can play out in different ways. A shorter loan term, for example, can save money in total interest paid to the lender over the life of the loan.

But the shorter repayment period typically requires higher monthly mortgage payments. You should measure these costs against the savings your new loan can provide. A refinance calculator can help you compare these current costs and ongoing savings.

A cash-out refinance, described above, can help you tap into this value and get a lower interest rate at the same time. But you can also access your equity without replacing your current loan. A refinance loan could pay off your first and second mortgages, replacing them with a single loan. If you have a HELOC or home equity loan you may choose to keep it while refinancing only your first mortgage.

The subordination process can take time depending on the second mortgage lender. So ask your lender to start this process early in your refinance. You can refinance your old loan at any point, but your opportunity to save is typically greater on newer mortgage loans. Restarting your mortgage with a new or year term would likely cost you a lot more in the long run. Although, some lenders offer a year mortgage term, which in this case could be a good solution. If you can reduce your rate by one-half to three-quarters of a percentage point or more, refinancing is likely worth it, as long as you plan to stay in the home long enough to recoup the closing costs.

You can also refinance to shorten your loan term and pay it off faster, resulting in less interest paid over the life of your loan.

One option is refinancing a year mortgage into a year one. If you have an adjustable-rate mortgage, refinancing to a fixed-rate loan can be a smart move, too. There are a few types of mortgage refinancing options to choose from:.

Before you start applying for offers:. Take the time to compare offers from a few different mortgage refinance lenders. The interest rate is of course a major consideration, but also take the time to review the closing costs and other loan terms.

If one of the offers includes an early repayment fee, for example, that means paying more if you decide to refinance again sometime in the future. When you actually apply for a refinance as opposed to getting a preapproval or prequalification , the lender is going to take a very close look at your credit and financial situation.

With a locked rate, even if market rates rise before you close on the loan, your rate will stay the same. This can occur for multiple reasons:. In general, these effects will only be felt for a short period of time. Any credit pulls related to your refinance in this timeframe will only be counted as one inquiry. How We Make Money. Erik J. Written by. Edited By Suzanne De Vita. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARM—which often has a lower monthly payment than a fixed-term mortgage—can be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.

These homeowners can reduce their loan's interest rate and monthly payment, but they will not have to worry about how higher rates go 30 years in the future. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments eliminating the need to refinance every time rates drop.

When mortgage interest rates rise, on the other hand, this would be an unwise strategy. While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt. Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodeling or a child's college education. These homeowners may justify the refinancing by the fact that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source.

Another justification is that the interest on mortgages is tax-deductible. Many homeowners refinance to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea.

Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt. Be aware that a large percentage of people who once generated high-interest debt on credit cards , cars, and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so.

This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage, and the return of high-interest debt once the credit cards are maxed out again—the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.

Another reason to refinance can be a serious financial emergency. If that is the case, carefully research all your options for raising funds before you take this step. If you do a cash-out refinance, you may be charged a higher interest rate on the new mortgage than for a rate-and-term refinance, in which you don't take out money. Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly.

When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: How long do I plan to continue living in the house?

How much money will I save by refinancing? It takes years to recoup that cost with the savings generated by a lower interest rate or a shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings.