What is a Refinance?

If interest rates have fallen since you took out your original mortgage, refinancing to a loan with a lower rate can reduce your monthly payments and total interest cost over the life of the loan.

Refinancing can allow you to adjust the term of your loan. For instance, moving from a 30-year to a 15-year mortgage can increase monthly payments but significantly reduce the total amount of interest paid. Conversely, extending the term can lower monthly payments but increase overall interest costs.

Some may refinance to switch from an adjustable-rate mortgage (ARM), which has a fluctuating interest rate, to a more predictable fixed-rate mortgage. Others might do the opposite to take advantage of lower initial rates offered by ARMs.

This involves taking out a loan that's larger than your current mortgage and pocketing the difference in cash. This option can be beneficial for those who need funds for large expenses such as home renovations, debt consolidation, or education costs.

Homeowners who have gained sufficient equity in their home can refinance to eliminate PMI, which is typically required when you initially put down less than 20%.

Some choose to refinance to consolidate high-interest debts, like credit card balances, into their mortgage, which typically has a lower interest rate.