A Guide to Refinancing Your Mortgage When the Time Is Right

An old real estate adage “date the mortgage rate and marry the house” likely rings true to anyone taking out loans this spring.

Since the golden era of cheap sub-3% rates ended in 2022, borrowing costs have soared. The whiplash sidelined many would-be buyers at first, but the possibility of lower interest rates in the future — made even more tantalizing by the current administration calling on the Federal Reserve to cut its benchmark rate — and the dream of homeownership could push some hopefuls off the bench and back into the market.

With rates still hovering in the high 6% range, they’ll have to swallow the extra cost for now, though aspiring purchasers may be pinning their hopes on refinancing down the line. A mortgage refinance, or “refi” for short, allows homeowners to negotiate new loan terms, including a lower interest rate, potentially shaving thousands of dollars off their annual payments.

Not so fast, experts say. Breaking up with your rate requires a little more finesse than autographing a new deal and financial advisers caution homeowners to read the fine print closely. When the time comes for a refi, here’s how experts said borrowers can navigate the process.

A Mortgage Refi Can Lower Rates — at a Cost

When a homeowner refinances a mortgage, they’re effectively trading in an existing home loan for a new one, according to Keith Gumbinger, vice president of HSH Associates. A homeowner can utilize the equity they’ve built in their home to apply for another mortgage with different loan terms — a lower rate, smaller monthly payments, a shorter loan term and more. Once a refi is approved, the lender uses the new mortgage to pay off the old one, leaving the borrower with a single loan and new monthly payments.

But nothing is free — and that goes for refinancing, too. Lenders make money by originating the refinance loan, charging closing fees upfront, rolling the closing costs into the balance of your refinanced loan, or locking in an interest rate slightly above the going market rate1. Then, the new refinanced loans are often packaged into mortgage-backed securities and sold to investors, said Greg McBride, chief financial analyst at Bankrate.

That’s why experts advise borrowers to do their homework on how a mortgage refi fits into their finances. “When you’re talking about changing your life’s largest debt, think about how this all integrates into your larger financial picture,” said Gumbinger. When the opportunity to refinance arrives, borrowers should first understand whether it’s worthwhile. To do that, experts advise borrowers to:

Understand Where You Are on Your Existing Mortgage
Determine your home equity2, which is the difference between the value of the home and the amount owed on the mortgage. The more equity you have in your home, the less risky you are to the lender — which means you’re more likely to get better rates and fewer fees.

Ensure You’re a Good Candidate for a New Loan
Homeowners still need to qualify for a refinance. When you apply for a refi, the lender will review your finances to assess your risk level and determine your eligibility. So check your credit score and try to settle any outstanding debts, which can help you negotiate favorable mortgage terms, said Gumbinger.

Do the Math to Figure Out If You’re Financially Ready
Get an idea of how refinancing will impact your finances by comparing new mortgage rates with your existing ones. But you’ll also want to calculate the closing costs and compare that to the mortgage savings associated with a refinance, said Dustin Smith, a financial adviser at Wealth Enhancement Group.

Also, be aware of the title fees, private mortgage insurance costs and mortgage taxes in your home state, said Melissa Cohn, regional vice president at William Raveis Mortgage. The most cost-effective way to fund a refi is to pay the closing costs3upfront, so save up some money ahead of time if possible.

There’s More Than One Way to Refinance

There are many mortgage refinancing options available to homeowners, said Gumbinger. Start by prioritizing your desired outcome. If your goal is to…

Lower Your Rate
Consider a conventional rate-and-term refinance, which changes the loan’s interest rate, the loan’s repayment term or both. Lenders typically allow mortgages to be modified to 10-, 15-, 20-, 25- or 30-year terms. Since most borrowers refinance to reduce their monthly payments, they often reset the clock with a new 30-year mortgage. Shortening a payment period increases monthly payments and reduces the total interest owed on a mortgage.

Get Cash Now
Ask for a cash-out refinance. This option involves taking out a bigger loan that exceeds the balance on your existing mortgage. At closing, the borrower pockets the difference in cash and can use the money as they see fit. Consider this path if your home value has risen or you’ve built up your equity. While cash-out refis allow borrowers to access a lump sum, they also increase monthly payments.

Skip the Upfront Costs
You can still get approved for a no-closing-cost refinance, which allows you to refi and get a lower rate but not have to pay the closing costs upfront. Instead, the lender will either roll those expenses into the loan or set an above-market interest rate. Pretending for a moment that rates are at 6%, in this scenario you may need to settle for something closer to 6.2% — which could still make refinancing worthwhile.

Other refinancing options may depend on the type of home loan you have and your financial situation. If you…

Receive a Large Amount of Money
Try a cash-in refinance. This type of refi allows borrowers to make a large payment on a home loan to reduce the principal balance and secure a new rate. It’s a good idea for those who have benefited from a financial windfall, whether it’s from a bonus, tax return, inheritance or other situation. Your money is better used paying down a mortgage at 7% than investing in interest-bearing investments, like certificates of deposit, said WEG’s Smith.

Have an FHA, VA or USDA home loan
A streamline refinance is available. Because these mortgages are insured by the government, the process requires less paperwork and underwriting, making it faster than a conventional refi. Streamline refis operate similar to other options but just help eliminate some of the process.

Want to Keep Your Current Mortgage
You might be able to ask for a mortgage modification, which involves asking your lender to modify the terms of your existing home loan when you’re behind on payments. But this refi-without-a-refi option is only available when lenders haven’t securitized the loan, according to Bankrate’s McBride. That typically includes local community banks or banks for ultra-wealthy clients. The option is also available to those with FHA, VA, USDA loans and conventional mortgages backed by Fannie Mae or Freddie Mac.

The Process Will Feel Familiar to Mortgage Holders

If you have determined which type of refi works best for you, it’s time to kick off the refinancing process. It’s much like the mortgage application process, albeit simpler and shorter. (The average refi takes about six weeks to complete.) Let’s walk through the steps...

Gather the Necessary Financial Documents
A lender will likely ask to see your recent pay stubs, federal tax returns, bank and brokerage statements and more. Organizing your paperwork ahead of time will allow you to easily apply with different lenders and compare offers.

Shop Around for Lenders
Borrowers should start by calling their current mortgage lender to get details about their existing mortgage and inquire about refi options. But don’t stop there: Research different lenders in your area or online to find the best deal. Bankrate’s McBride recommends filing refinance applications with three different lenders on the same day to get the most effective comparison. The most important number to evaluate? McBride said to look at the APR, known as the annual percentage rate, which incorporates the cost of the rate and the fees.

Accept a Refi Offer and Go Through Underwriting
Once a borrower submits their refinance application, the lender will begin the underwriting process. To ascertain your financial standing, a lender will run a credit check, ask you to disclose all your assets and liabilities and review your financial documents.

Get a Home Appraisal
A mortgage refinance typically requires an appraisal to determine the property’s current market value. You will pay a professional appraiser to assess your home. Other lenders may appraise your home using a financial model, which can come at no cost to the borrower.

Lock or Float Your Interest Rate
Mortgage rates shift constantly, meaning the rate you’re initially offered could change during the application process. So once a borrower has an idea of the closing date, experts advise locking in the interest rate at that point and time. If you “float” the interest rate, you’ll have to settle on the market rate on your closing date whether it’s higher or lower. That’s why locking in a rate can provide security for those who want to know what they’re signing up for. You can typically lock in a rate for free if the closing is within 30 days; any longer can incur a fee. Lenders may also offer a “float-down option,” which lets borrowers access a lower rate should numbers trend in a favorable direction — for a fee.

Close on Your Refinance Loan
The final step of the refinancing process is closing. At least three days before the closing date, the borrower will receive a closing disclosure4. On closing day, you’ll meet a representative from the lender, sign loan documents and pay any closing costs that aren’t rolled into the loan.

Whatever You Do, Don’t Do This…

What advice you should take can vary based on a person’s financial situation. But for those who follow any number of self-proclaimed personal finance gurus on TikTok, there are things you should be wary of.

Watch Mortgage Interest Rates, Not the Fed
Maybe you’ve heard about the Fed “cutting.” While the central bank’s actions certainly influence mortgage rates, Fannie Mae Chief Economist Mark Palim clarifies that there isn’t a “one-to-one connection.” In other words, mortgage rates don’t always change when the Fed moves. In fact, borrowing costs for a mortgage just ticked up after the Fed cut the benchmark rate.

While Fannie Mae forecasts that the average rate will fall to 6.6% by the end of 2025, Palim said borrowers should never try to time rates. “Leave that to the hedge funds,” he said. “Look at your personal budget and consider transaction costs. When it makes sense to you personally and economically, do it.”

Free Money Isn’t Free
WEG’s Smith warns homeowners to be mindful of how they use the money from a cash-out refinance. Some treat cash-outs like free money, using the funds for investments or personal purchases. But don’t forget: Cash-out refis increase your monthly payments and liability.

Watch the Clock
Borrowers may be tempted to refinance whenever they spot an advantageous rate drop. While the immediate savings may seem attractive, you risk elongating your payment period, increasing your principal and adding to your total interest payments — which could complicate your retirement plans or force you to make mortgage payments while on a fixed income.

“Sometimes you’re much better off with your current loan, but we all get lured by a lower payment,” Smith said.