How to Refinance Your Home

Bill Nelson is a planning excellence lead consultant at Northwestern Mutual.

While the majority of home purchases are made with the help of a mortgage (74 percent in 2024), many homebuyers are nervous by the thought of such a serious financial commitment.

After all, most mortgages last for 30 years. What if you take out a mortgage and then interest rates drop? What if you change jobs and have difficulty making the same payments? What if you need to access some of the equity that’s locked away in your home?

The good news is that you aren’t locked into one mortgage forever. Thanks to a process known as refinancing, you may be able to change the terms of your loan before you fully pay it off.

Below, you’ll learn what refinancing is, how it works and why you might consider different types of refinancing (rate-and-term refinancing or cash-out refinancing). You’ll also learn about the process of refinancing your mortgage, explore the pros and cons and be well on your way to deciding whether refinancing is right for you.

What is refinancing?

When you refinance a loan, you essentially replace an existing loan with a new loan. You get new terms, such as a different interest rate, monthly payment or repayment schedule.

A mortgage is one type of loan that can be refinanced. You’ll understand the general idea if you’ve refinanced a student loan or auto loan.

How does refinancing a mortgage work?

Exactly how refinancing works will depend on the type of refinancing you’re pursuing. There are two common types most people consider: rate-and-term refinance or cash-out refinance.

Rate-and-term refinancing

With a rate-and-term refinance, you replace your existing mortgage with a new one for the same amount. It’s also called regular refinancing or loan modification. If you owe $150,000 on your current mortgage, for example, your new loan would also be for $150,000 plus interest. The specific terms of your loan, such as the following, can change:

Your interest rate: Many people choose to refinance their mortgage to lower their interest rate. For example, if your financial situation has changed—maybe you’ve improved your credit score significantly since borrowing your first mortgage—you may get a better rate. And if the economy has changed, it could lead to a market-wide reduction in interest rates that you want to take advantage of. Refinancing to a lower interest rate can reduce your monthly payments while also reducing the total amount of interest you pay over the life of the mortgage.

Your repayment term: If it’s difficult to make your current payments, you might consider refinancing to a longer repayment term. This can lower your monthly payments. The catch is that since it will take you longer to pay off the loan, you’ll usually pay more in total interest over the years.

Your rate type: An adjustable rate mortgage (ARM) has interest rates that fluctuate depending on the underlying economy. In a worst-case scenario, this means you could face much higher interest rates—and monthly payments—if market-wide interest rates rise. If you’d prefer the peace of mind that comes with a stable payment amount, you might decide to refinance to a fixed-rate mortgage instead.

Cash-out refinancing

A cash-out refinance, on the other hand, allows you to access some of the equity that you’ve built in your home. As a result, your new mortgage would actually be larger than your current mortgage—and the difference would be yours to spend however you want. In this way, a cash-out refinance is similar to a home equity loan or home equity line of credit (HELOC), which also allows you to tap into your home equity.

If your current mortgage is $110,000, for example, and you cash-out refinance to a $140,000 loan, that would essentially mean that you’re gaining access to $30,000 of your home’s equity as cash.

How much cash you can get from cash-out refinancing will depend on several factors, including your home’s value, how much equity you have in your home and how much you owe.

5 steps for refinancing your home

The exact process varies, but if you’re looking to refinance your home, here are the basic steps:

1. Determine your financial goals

Think about why you want to refinance your mortgage. For example, you might want to reduce your interest rate so you’re not paying so much in interest over the life of the loan. Or maybe you want to reduce your monthly payments to free up money in your budget for other things—like retirement savings or paying off debt. Talking to your Northwestern Mutual financial advisor can be a great way of getting clear about your goals and the best way to accomplish them.

2. Assess your current financial situation

Before applying for a refinance, it’s also a good idea to understand where you currently stand financially. This will affect how likely you are to be approved for a mortgage refinance, the interest rate you could get and how much you could borrow in a cash-out refinance.

Some factors to consider include your:

• Credit score
• Debt-to-income ratio
• Net worth
• Home equity (the amount of ownership you have in the house)
• Income (from your job as well as other sources like passive income or investment income)

If you don’t think you’re hitting the mark in any of these areas, it may be a good idea to hold off on refinancing. Once your numbers improve, you can get the most value out of refinancing.

3. Find a lender

Different lenders have different offerings, so you’ll want to shop around for a lender that offers the type of mortgage refinance you’re interested in.

Your current bank or lender might be an option—but don’t let convenience keep you from shopping around to find the best possible deal. Lenders may differ on costs, interest rates, repayment terms or loan amounts.

4. Complete the paperwork

After you’ve selected a lender, you’ll need to submit an application and supporting documents, just like when you applied for your first mortgage. While these can vary a bit from lender to lender, it will usually include things like your recent:

• W-2s or tax returns
• Pay stubs
• Bank account statements
• Investment account statements

You’ll need to arrange for a home appraisal, which your lender will need to determine the current value of your home, your existing home equity and, ultimately, how much you can borrow.

5. Close on the loan

Once you’ve submitted your application, the loan will need to go through the underwriting process. The lender verifies the information you’ve provided and makes sure that you’re a good candidate for a refinance. The whole process usually takes 30 to 45 days, but some lenders may be able to close your loan within a few weeks. In a cash-out refinance, you’ll receive any funds after the close.

During the underwriting process, it’s important to continue making mortgage payments to your current lender so that you don’t miss any payments, which could harm your credit.

Pros and cons of refinancing a home

Before you decide to refinance your home, it’s important to consider the pros and cons that come with it.

Pros of refinancing

• Interest savings: If a rate-and-term refinance gets you a lower interest rate, you can save a lot of money over a 30-year mortgage.
• Lower monthly payments: Likewise, refinancing could help you reduce your monthly payments—freeing up money in your budget that you can use to boost your savings, pay down costly bad debt or put to work in the market.
• A shorter term: In some instances, you may choose to refinance to a shorter term, empowering you to pay off your mortgage faster.
• Eliminating private mortgage insurance (PMI): If your lender currently requires you to carry private mortgage insurance because your down payment was too small when you bought the home, refinancing could help you remove this requirement ahead of schedule.

Cons of refinancing

• It might increase your debt: With a cash-out refinance, your new mortgage will be larger than the previous one. Taking on more debt could make it harder to pay back or reduce the amount you’re saving toward long-term goals like retirement.
• It could reduce your equity: A cash-out refinance can reduce the amount of ownership you have in the home. In the long run, that could make your mortgage more likely to exceed the home’s market value—which is known as being “underwater.” If you sell the home while underwater, you could end up paying the difference.
• It isn’t free: You’ll need to pay closing costs when you refinance your home, which could cost thousands of dollars and eat into any cost savings you realize from lower interest rates or a shortened repayment term.
• It can delay debt paydown: It might seem like a smart financial move to use a cash-out refinance to manage debt (such as credit card debt). But this type of refinancing replaces one type of debt with another. Instead of refinancing, you may need to re-evaluate your spending habits and cash flow to see what changes you can make.
• It can hurt your credit score: Refinancing includes a hard credit check and may shorten your credit history, both of which can hurt your credit score in the short term.

More frequently asked questions about home refinancing

Below we answer some other common questions about refinancing that can help you determine whether or not it makes sense for you.

How much does home refinancing cost?

Unfortunately, refinancing isn’t free. You’ll see closing costs—including application fees, loan origination or underwriting fees, recording fees, appraisal fees, credit check fees, title services, survey fees and attorney fees. While these vary depending on where you live, the size of your loan and your new lender’s rates, most homeowners should expect to pay between 2 and 6 percent of the new loan balance in fees.

With this in mind, if you want to refinance a $200,000 mortgage, you can reasonably expect to pay between $4,000 and $12,000 in fees. Depending on your lender, you may be able to add these costs to your new mortgage in a process known as a “no closing cost refinance.” But this may cost you more over the life of the loan compared with paying the closing costs upfront.

Does refinancing hurt your credit score?

Yes, refinancing your home can negatively affect your credit in a few ways. Overall, the impact of refinancing on your credit score is usually minor and temporary.

• Because your new lender will perform a credit check, you may see a small ding to your score in the short term. The effect of this check will typically subside within two years. And if you shop around and have multiple inquiries within a short period (usually 14 to 45 days, depending on the credit scoring model), they may be counted as a single inquiry, which minimizes the impact.

• Refinancing creates a new account on your credit report, which can slightly lower your credit score because new accounts typically have a shorter credit history. And the closure of the old account can affect the length of your credit history, which is another factor in your credit score.

At the same time, it’s important to consider the possible positive effects of refinancing. If refinancing means you’ll have an easier time making payments—for example, because it lets you lower your monthly payment—then it could improve your credit score over the long term.

How soon can you refinance a home?

Unfortunately, there will often be a waiting period before you can refinance a mortgage loan. The shortest waiting period is typically six months. The longest waiting period is usually 24 months. The most straightforward way to find out your waiting period is to look at your mortgage agreement itself.

Your payment history may also be a factor in how quickly you can refinance. For example, a history of consistent payments for 180 days could be a requirement.

What is a conventional loan?

Private lenders offer mortgages called “conventional” loans. These are insured by banks and other financial institutions rather than the government. On the other hand, several federal government programs insure loans.

• Federal Housing Administration (FHA) loans are designed to help low- to moderate-income borrowers and first-time homebuyers.
• Veterans Affairs loans are available to eligible veterans, active-duty service members and surviving spouses.
• United States Department of Agriculture loans are intended for low- to moderate-income borrowers in rural areas.

When it comes to refinancing, the main differences between the loan types are the waiting period and whether they specify a repayment history. If you currently have a conventional loan and think you might qualify for one of the government-insured loans, you may want to consider refinancing into that loan type. Or if you already have a government loan such as FHA, you could look into whether you qualify for a refinance into a conventional loan to eliminate mortgage insurance. Other than that, the only significant difference is where you send your payment.

How many times can you refinance your home?

At the end of the day, there are no laws that limit how many times you can refinance your home. Some homeowners refinance multiple times over the course of a 30-year mortgage. But it’s important to consider the costs, which can add up and could outweigh the benefits that you gain from refinancing. You might also take a short-term hit to your credit score each time you refinance.

Consider how refinancing can affect your greater financial plan

If you have significant equity in your home, cash-out refinancing offers a viable means of accessing that equity so that you can put it to use. Likewise, rate-and-term refinancing makes it possible to lower your mortgage’s interest rate, monthly payments—or even both. In both cases, a refinance can make it easier for you to work toward your financial goals.

As you think about whether to refinance, your Northwestern Mutual financial advisor can be a helpful sounding board for the impact on your finances. Ideally, you may find yourself with additional money to work with, and your advisor can give you ideas for how to use those savings. Your advisor can also help you understand how you’re balancing risk with growing your money.

It all starts with a conversation. Your advisor will ask questions to learn about what’s important to you and make recommendations that match your values.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.