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Mortgages & financing

Refinance

Also called refi, cash-out refinance, rate-and-term refinance

In short

To refinance is to replace an existing mortgage with a new one, usually to get a lower rate, change the loan term, or take cash out of the home's equity.

Main types
Rate-and-term, cash-out
Costs
Closing costs apply
Key test
Break-even point
Investor use
BRRRR cash-out

Types of refinance

  • Rate-and-term: changes the rate, term or both without taking cash out.
  • Cash-out: borrows more than you owe and pays you the difference from your equity.
  • Streamline: simplified refinances offered by some government loan programs.

Does it pay off?

Refinancing has closing costs. Divide those costs by your monthly savings to find the break-even point: months to break even = total refinance costs ÷ monthly savings. If you'll keep the loan longer than that, the refinance usually makes sense. Resetting to a new 30-year term can lower payments but raise total interest.

Refinancing in investing

In the BRRRR method, investors buy with cash or hard money, renovate, rent, then cash-out refinance based on the new value to recover their capital. Lenders limit the LTV and may require a seasoning period before they'll use the new appraised value.

The formula

Break-even point
Break-even months = Closing costsMonthly payment savings
Try it in the Refinance Calculator →
Example

Finding the break-even point

An owner with a $280,000 balance at 7.25% (about $1,910 a month) refinances to a new 30-year loan at 6.25% (about $1,724 a month). Monthly savings are $186. Closing costs are $6,000. Break-even = $6,000 ÷ $186 ≈ 32 months. If they plan to stay at least three years, the refinance likely pays off.

Refinance vs. Loan Modification

Refinance

To refinance is to replace an existing mortgage with a new one, usually to get a lower rate, change the loan term, or take cash out of the home's equity.

Loan Modification

A loan modification is a permanent change to a mortgage's terms, such as a lower rate, longer term or added past-due amounts, that a lender agrees to so a struggling borrower can afford payments.

The differenceA refinance replaces your loan with a new one, often with a different lender; a loan modification changes the terms of your existing loan, usually because you're struggling to pay.

Frequently Asked Questions

Related terms

Home EquityMortgages & financingHome equity is the portion of a property you own outright: its current market value minus everything owed on it. It grows as you pay down the loan and as the home's value rises.Loan-to-Value Ratio (LTV)Mortgages & financingLoan-to-value ratio (LTV) compares the size of a mortgage with the property's value. A lower LTV means more equity and less risk for the lender, which often brings better loan terms.BRRRR MethodInvestingThe BRRRR method is a rental investing strategy: buy a distressed property, rehab it, rent it, refinance based on the higher value, and repeat with the cash pulled out.Closing CostsBuying & closingClosing costs are the fees and prepaid expenses paid to complete a real estate purchase, beyond the price and down payment. Buyers typically pay about 2% to 5% of the loan or purchase price.AmortizationMortgages & financingAmortization is the process of paying off a loan with regular, fixed payments over time. Early payments go mostly to interest; later payments go mostly to principal.MortgageMortgages & financingA mortgage is a loan used to buy real estate, secured by the property itself. If the borrower stops paying, the lender can take the property through foreclosure to recover what is owed.AppraisalBuying & closingAn appraisal is a licensed appraiser's independent estimate of a property's market value. Lenders require one to make sure the home is worth at least the amount being borrowed.Hard Money LoanMortgages & financingA hard money loan is a short-term loan from a private lender, secured mainly by the property's value rather than the borrower's income. Investors use it to buy and renovate properties quickly.

Learn more in the knowledge base

How to Finance a Foreclosure or Distressed PropertyGuide · 7 min readDistressed properties are harder to finance than move-in-ready homes. Condition, timing and the seller's terms all limit which loans will work. This guide matches financing options to each kind of distressed purchase and explains the trade-offs.Closing Costs Explained: What Buyers Pay and WhyGuide · 9 min readClosing costs are the fees and prepaid expenses due when a purchase completes, on top of the down payment. They vary by state, loan and price, and some are negotiable. This guide explains each category, how to read your disclosures and how to keep costs down.How to Get Pre-Approved for a MortgageGuide · 7 min readA pre-approval tells you, and the sellers you make offers to, how much a lender is prepared to lend after checking your income, assets and credit. This guide explains how it differs from pre-qualification, what to gather, how to compare lenders and what can change the answer before closing.
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Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.