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Refinance
Definition
Refinancing is the process of replacing an existing mortgage or loan with a new one, typically to obtain a better interest rate or different terms.
Explanation
Borrowers refinance primarily to lower their interest rate, reduce monthly payments, change loan terms, or access home equity. Refinancing involves closing costs (typically 2-5% of the loan amount), so you need to calculate whether the long-term savings justify the upfront costs.
The break-even point — when monthly savings offset closing costs — is key to deciding if refinancing makes sense.
Example
Refinancing a $250,000 mortgage from 7% to 5.5% saves about $240 per month. With $5,000 in closing costs, the break-even is 21 months.