Refinancing a mortgage: Steps, benefits & considerations

What you’ll learn:

— What a mortgage refinance is and how it works

— When and why it makes sense to refinance a home loan

— Types of refinancing

— Potential drawbacks of a refinance

Thinking about saving money on your monthly payments or tapping into your home’s equity? Refinancing your mortgage could be the key. It involves replacing your existing home loan with a new one. Under the right circumstances, this option can lower your monthly payments, reduce interest costs, and help you build wealth. Timing, however, is everything.

So, when is it a good time to refinance? What changes should you consider for your loan? This guide will walk you through the entire process, explain when it can make sense, and explore the different options available.

What does refinancing a mortgage mean, and how does it work?

When refinancing a home mortgage, your new loan pays off your old one and replaces it, usually with better terms. Once your lender funds the new loan, you no longer have to worry about making payments on your old one. You’re only responsible for the refinanced mortgage.

Just like with your original mortgage application, your lender will evaluate your income, credit, and non-mortgage debt burden. You’ll apply, then wait for your lender to run a credit check and review your financial profile. They also usually request an appraisal. Underwriting and closing complete the transaction. The entire process usually takes between 30–50 days, depending on market conditions.

Refinancing isn’t free. Closing costs are usually between 2–5% of the new loan amount. But a refinance is often still worth it depending on your “break-even point” — how long it takes to recoup the up-front costs with your monthly savings.

Reasons for refinancing your home loan

Whether or not you should refinance your mortgage depends on your monthly payments, financial goals, and current market conditions. This option might make sense if you want to:

— Lower your interest rate and monthly payments: If market rates or your credit profile have improved since your first loan, refinancing can reduce your interest rate and monthly payments.

— Change your loan term: Shortening the term (e.g., 30 to 15 years) can help you build equity faster and pay less interest over time.

— Switch your loan type: Replace your current loan with a different one to get better terms. For example, move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa, depending on your financial goals.

— Consolidate multiple mortgages: Combine a first and second mortgage to simplify your repayment structure.

— Add or remove a borrower: Adjust who’s responsible for the loan after major life changes like marriage, divorce, or death.

— Access your home equity through a cash-out refinance: Borrow more than you owe on the house to fund renovations, pay off debt, or cover major expenses.

Want to know if a refinance is worth it? Try Better’s refinance calculator to see if it’s right for you.

...in as little as 3 minutes – no credit impact

6 mortgage refinance options

There are several different types of home loans for refinancing, and it’s critical to understand when and why each option makes sense. Here’s a list of the six most common refinancing types.

1. Debt-consolidation refinance

Use a refinance to roll high-interest debt into a lower-rate mortgage payment. A debt-consolidation refinance can help homeowners reduce credit card or personal loan debt.

2. Streamline refinance

Use “streamline” refinance programs to refinance your existing loan faster and with less paperwork. For example, an FHA streamline generally doesn’t require an appraisal and looks at your income less closely.

3. Cash-out refinance

A cash-out refinance involves replacing your existing mortgage with a larger one and receiving cash at closing. Many homeowners use this as a strategy to fund major home improvements or cover unexpected expenses. Most lenders require you to retain at least 20% equity in your home. This means you can typically borrow up to 80% of your home’s value minus your current mortgage balance.

4. Rate-and-term refinance

Change your rate and loan term without taking any cash out. This is usually the lowest-cost option, though whether it’s worth it depends on market interest rates and the equity you’ve built.

5. Adjustable-rate mortgage (ARM) refinance

Switch from an adjustable to a fixed-rate mortgage to lock in predictable monthly payments. Conversely, refinance a fixed-rate loan to an adjustable-rate if you plan to sell soon. ARMs often start with lower interest rates, which can reduce your short-term payments.

6. Program-to-program refinance

Once you’ve built up sufficient equity, you can refinance from an FHA mortgage to a conventional loan to remove mortgage insurance premiums. This move typically requires a credit score of at least 620 and a debt-to-income (DTI) ratio of 43% or less.

How to refinance a mortgage: 7 steps

Refinancing looks a lot like applying for a mortgage for the first time. Let’s walk through seven key steps.

1. Review your current loan and goals

Decide what you want to change about your current mortgage. Possible refinancing goals include:

— Lowering monthly payments

— Reducing total interest

— Gaining fixed-rate stability

— Paying off your loan faster

— Consolidating debt

— Accessing cash for renovations or other expenses

Before you apply, make sure you calculate your break-even point using Better’s refinance calculator.

2. Check your credit score and history

Credit affects refinancing terms and approval. Review your credit report, correct any errors, and pay down revolving balances. A strong credit profile can improve your terms and help lower your DTI ratio.

3. Choose a lender

You don’t have to stick with the same lender when you refinance. Compare rates and closing costs across different lenders. Better makes refinancing easy with flexible options, competitive refinance rates, and a quick pre-approval process through our digital platform.

4. Get pre-approved

Submit your basic financial information so the lender can determine how much you can borrow and what terms to expect. Lenders review your credit, income, and debt.

5. Submit your application and supporting documents

Provide your pay stubs, W-2s, and bank statements. Be prepared for a credit check and a home appraisal order. Your lender will tell you how much you’re pre-approved for and provide a loan estimate with expected terms.

6.  Lock in your rate, and wait for underwriting

Once you’re satisfied with your terms, lock in the rate to secure it. After that, the underwriting process verifies your documentation, appraisal, and loan details. Refinances can take time, but digital lenders like Better often make the process quicker.

7. Close and start making payments on the new loan terms

Review your settlement documents, and note your first payment date. At closing, your new loan pays off your old one, and you begin making payments on the updated terms.

...in as little as 3 minutes – no credit impact

Things to consider when refinancing a mortgage

It’s not always a good idea to refinance. It depends on your existing loan, goals, and market changes.

Here are some potential drawbacks to consider:

— Restarting the loan clock: Starting over with a new 30-year mortgage may lower your monthly payments, but it also increases the total amount of interest you pay over time.

— Closing costs: Expect to pay between 2–5% of the new loan amount on closing costs.

— Appraisal hurdles: The home appraisal value can affect approval and the amount you’re able to borrow. Lenders use the appraisal to confirm the property’s market value and ensure it adequately secures the mortgage.

— Cash-out tradeoffs: A cash-out finance puts money in your pocket, but it also increases your loan amount and tends to carry slightly higher rates.

— Timing and market rates: If you plan to sell soon, you may not have time to recoup all your closing costs.

Should you refinance your mortgage?

Deciding if and when to refinance depends on your goals, how long you plan to stay in your home, and the financial impact. If you can secure a new rate that meaningfully lowers your payments or total interest, refinancing can be a great option. But you also need to stay in your home long enough to reach the break-even point.

Do you plan to sell soon? Does your current mortgage have a pre-payment penalty? Has your credit taken a hit? These are all good reasons to consider holding off on refinancing. You may also want to wait if market interest rates are higher than the rate on your existing loan.

Refinance faster with Better

Refinancing your mortgage can help you lower your monthly payments and consolidate debt. The process is similar to your first mortgage: Choose a lender, submit your application, and close on the new loan. Along the way, it’s important to weigh factors like closing costs and loan terms to ensure refinancing makes financial sense.

Better makes refinancing simple. Get pre-approved in as little as three minutes, explore your options, and complete your refinance quickly and efficiently.

Ready to see if refinancing is right for you? Apply now and get answers right away.

...in as little as 3 minutes – no credit impact

FAQ

Can you refinance your home in the first year?

Yes, but it depends on the loan type and specific terms. Some conventional loans can be refinanced right away, while most government-backed mortgages (like VA or FHA loans) usually have a waiting period.

What are the steps in refinancing a mortgage?

Refinancing a mortgage involves several key steps. First, consider why you want to refinance and review your credit, equity, and DTI ratio. Next, shop for lenders and compare rates to find the best terms. Then, submit financial documents and complete the application. 

After that, the lender verifies your information and approves the loan. Finally, close on the new mortgage by signing the paperwork, paying closing costs, and replacing your old loan with the new one.