Last updated: December 07, 2023

Mortgage Products

What does it mean to refinance a house?

Happy family in their house with a new mortgage refinance

Refinancing a house means trading in your current mortgage for a new one that offers either better rates and terms or a lump sum of cash for a home improvement project or other large expense. Kicking off the refinancing process is simple: request quotes from lenders, choose the one that’s best for you, and submit your application.

However simple it may sound at first, the mortgage refinance process can initially seem daunting for many people. If you’re intimidated by refinancing your mortgage, learning how a refinance works can help you decide whether now is the right time to refinance.

What to know about refinancing a mortgage

  • A mortgage refinance replaces your current mortgage with a new loan with different terms and monthly payments.
  • Refinancing a mortgage may lower your mortgage rate, tap into home equity, or change your term length.
  • With different types of refinances available, comparing refinance options may help you make the best choice for your needs.

Once you’ve learned how a refinance works and how one might benefit you, you’ll be ready to start your refinance application.

With this information, you can make a much more informed decision on what you’d like to do with your home, and the equity you’ve built up in it.

What is a mortgage refinance?

Mortgage refinancing is the process of replacing your original mortgage with a new mortgage featuring more favorable terms or rates. You’re essentially replacing your initial mortgage with a new one, giving you an opportunity to lower your interest rate and reduce or lengthen the term length. If you’ve built equity in your home, you may also be able to take cash out during the refinancing process.

How refinancing a mortgage works

A refinance is when you get a new mortgage to pay off the balance on your existing mortgage. When used correctly, a refinance provides benefits that may save you money on monthly payments, shorten your mortgage length, or let you get cash for big purchases.

Learning how to refinance a house might seem like a big task, but refinancing is like the mortgage application process. Once you choose a lender and submit your application, a loan officer begins the underwriting process. They will verify your financial details and appraise your home to estimate its current value.

You’ll also have to be aware of the closing costs, fees, and interest rates a given lender charges, so getting quotes from a few different lenders is often a great idea.

After the underwriting process, you’ll receive a Closing Disclosure (CD) outlining the mortgage details. Always compare your initial loan estimate with the CD to ensure the figures are the same and, if not, be sure to ask questions and understand why the numbers changed.

Mortgage refinance application

Many lenders may allow you to easily apply for your mortgage refinance online or over the phone. During this process, you may be asked to provide:

  • Personal information such as your address, social security number, and employment status
  • Property information such as your home’s estimated value
  • Your existing mortgage balance
  • Monthly or annual income amount


After the application process, you may be approved for mortgage refinancing (remember that approval may be conditional upon contingencies required by your lender). At this time, you’ll work with your lender to decide on terms, including your interest rate, repayment term, and any equity you’d like to access.

Underwriting process

Your lender may request documents to help underwrite your new loan, including:

  • Government-issued ID
  • Tax returns
  • Proof of income
  • W2s, 1099s, or pay stubs
  • Bank statements
  • Current mortgage paperwork

The lender’s underwriter will ensure that your personal financial situation matches the requirements of the refinanced mortgage.


Your lender may choose to assess the value of your home either by using an automated valuation using current market information or by scheduling an in-person appraisal by a professional appraiser.


After your loan is processed, you will close on your new mortgage by signing your documents. Depending on your lender and terms, you may also have to pay closing costs at this time. When researching lenders, be sure to look at what you might expect to pay at closing. This will vary with between lenders, with some offering to cover various costs and fees at closing or during the mortgage process.

Thinking it’s time to refinance? With a mortgage refinance from Discover Home Loans, you can select terms of 10, 15, 20, or 30 years and pay $0 application fees, $0 origination fees, $0 appraisal fees, and $0 costs due at closing. 

Top reasons to refinance a mortgage

Not sure if refinancing is the right move? Here are the most common reasons for a mortgage refinance:

  • Lower your mortgage rate: One of the most common reasons people refinance their mortgage is to lower their mortgage interest rate. Saving just a percent or two on your mortgage’s interest rate may translate to thousands or tens of thousands of dollars in saved interest payments over the life of the loan. Remember that the current refinance rates available to you need to be lower than your current rate to save money this way.
  • Refinance to take out equity: Another common reason that people refinance their mortgage is to pull equity out of their home through what’s known as a cash out refinance. Since many lenders only require that a borrower has an 80%-90% loan-to-value (LTV) ratio, there is an opportunity for those with substantial equity to pull some equity out of their home in the form of cash. The reasons for this vary, but people often use the cash to improve their homes, pay off debt, or fund a large purchase.
  • Cancel mortgage insurance: Typically, mortgage insurance is required if you put less than 20% of a home sale price as down payment at closing. Suppose your home has appreciated in value or you’ve built enough equity to push you over that 20% equity threshold. In that case, a refinance may remove mortgage insurance payments and save you hundreds of dollars a year.
  • Change your term length: Another reason you might want to refinance their mortgage is to change the loan term. You may want to lengthen the loan term and lower your monthly payment, or you may want to shorten the term to pay off their home faster. Work with your lender of choice to determine what may work best for you.

If any of these reasons sound like they may help you achieve your financial goals, try using a refinance savings calculator so you can get a better idea of how much a mortgage refinance might impact your finances.

When to refinance your home

Even though there is no rule limiting how often you can refinance, lenders may require you to wait at least six months from starting your original mortgage before you refinance. Once you’ve made six monthly payments on your home, you can start looking at refinancing options.

Beyond that, the best times to refinance your home are:

  • When you can lower your interest rate. If market interest rates are notably lower than the rate you’re paying now, you can refinance your mortgage with a new, more affordable rate.
  • When you have improved your credit or income. If your credit profile or your income have improved since you earned your original mortgage, a refinance may allow you to take advantage by earning lower interest rates against your mortgage balance.
  • When you can shorten your loan term. If you’re able to shorten your loan term from a 30-year mortgage to a 15-year mortgage, you can pay off your home more quickly and pay less interest over the lifespan of your loan. Of course, this will likely increase your monthly mortgage payments, but the savings across the loan can make this an appealing option for refinancers.
  • When your equity has increased. If you’ve built equity in your home, you can take out a lump sum of cash during the refinancing process – even if the length and rates of your refinance mortgage remain the same.

Types of mortgage refinances

If you are looking to refinance your mortgage, there are many ways to do so. However, a single lender rarely offers every type of refinance, so make sure you research your top choices to compare what options they offer and find out what you may be eligible for.

  • Cash out refinance: A cash out refinance lets you pull equity out of your home. When you use a cash out refinance, your new loan will have a larger balance than your current loan. The difference between these two balances is how much money you receive in cash. You can use that money for anything, from paying debts to vacationing.
  • Conventional refinance: A conventional refinance, also known as a rate and term refinance, allows you to change the interest rate and the length of your payback period (term). Conventional refinances are typically used to lower your monthly housing payment and are one of the most common forms of refinancing.
  • Streamline refinance: A streamline refinance is very similar to a conventional refinance, except it only applies to federally backed loans, such as FHA, USDA, and VA loans. Streamline refinances allow you to keep your federally backed mortgage while lowering your monthly payment by getting a lower interest rate or by changing the loan term.
  • Reverse mortgage: Reverse mortgages are a great way for seniors to supplement their retirement income. When you take out a reverse mortgage, instead of paying the mortgage lender each month, the mortgage lender pays you every month by pulling equity from your home. A reverse mortgage helps to provide a steady source of cash flow for seniors to pay for their day-to-day expenses.
  • Cash-in refinance: A cash-in refinance is another way to lower your monthly payment. As the name suggests, a cash-in refinance requires you to put additional money into your home when closing. A cash-in refinance can be a great way to make a lump sum payment on your loan while potentially lowering the interest rate or changing the term of the loan.

What are the closing costs on a mortgage refinance?

The closing cost to refinance your mortgage is on average 2 to 5 percent of your loan amount. On a $200,000 mortgage, refinancing can cost from $4,000 to $10,000. Some lenders offer to absorb some of the closing costs.

If your refinance comes with closing costs, you’ll want to determine where your break-even point is to decide whether refinancing makes sense. This is the point when your savings from refinancing cover the costs of refinancing. The break-even point is different for everyone and depends on your loan’s terms.

What are some alternatives to refinancing?

There are two main alternatives to refinancing: home equity loans or home equity lines of credit (HELOCs).

  • A home equity loan lets you borrow a fixed amount, secured by the equity in your home, and get money in one lump sum upfront. Many borrowers like that home equity loans act as a second mortgage without impacting their original mortgage. In other words, if you already have a low rate on your mortgage and want to keep it, a home equity loan can allow you to do that while still taking money from your equity.
  • HELOCs, on the other hand, let a borrower tap into their equity as needed for a fixed period and up to a predetermined credit limit. A home equity loan has a fixed interest rate, whereas a HELOC typically has a variable rate.

Both HELOCs and home equity loans are different from equity financing with a mortgage refinance because of one key aspect: these types of borrowing will have you paying back your original mortgage and give you a second bill to pay off the new loan or line of credit. Cash out refinancing, by contrast, bundles both your mortgage loan payment and what you borrow from your home equity into one monthly payment.

Refinancing your mortgage and important research tips

Refinancing your mortgage can be a smart financial move when done strategically and with proper research.

Here are a few details you may want to consider before you submit an application:

  • Understand your current mortgage terms. Review your existing mortgage agreement to have a clear understanding of your current rates, loan term, and any prepayment penalties that may apply.
  • Determine your financial goals. Identify the primary reasons for refinancing your mortgage, such as lowering your monthly payment, shortening your loan term, or tapping into your home equity.
  • Check your credit score. Your credit score will play a role in determining your eligibility for refinancing and the interest rates you may be offered.
  • Check your credit report: Make sure to check your full credit report ahead of time so you can address any discrepancies or errors before applying for a refinance.
  • Research current market rates. Keep an eye on current mortgage interest rates to identify the best time to refinance. Timing your refinance when rates are low may lead you to save money over the life of your loan.
  • Compare multiple lenders. Shop around and obtain quotes from multiple lenders to ensure you’re refinancing in a way that works best for you.
  • Consider closing costs. Refinancing can come with closing costs. Be sure to factor these into your decision-making process and determine if the potential savings from a refinance will outweigh the expenses.

Refinancing your mortgage may be a way to better manage your finances and achieve your financial goals. Before applying, it’s important to be well-informed and prepared so you can decide what works best for you.

If you’re thinking about refinancing, Discover® Home Loans has tools and resources to help you understand your options. Use our mortgage refinance calculator or cash out refinance calculator to find out what might work best for you.

Please note: Discover Home Loans does not offer streamline refinancing, cash-in refinancing, reverse mortgages, or HELOCs. 

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