When you refinance your home, you replace your existing mortgage with a new loan , usually from the same or a different lender. The new loan pays off the old one, and you start fresh with a new interest rate, monthly payment, and loan term.

What actually happens

  • Your current mortgage is paid off in full using the proceeds of the new loan.
  • You sign a new mortgage agreement with updated terms (interest rate, length, sometimes lender).
  • You’ll typically pay closing costs (origination fees, appraisal, title, etc.), similar to when you first bought the home.

Common reasons people refinance

  • Lower interest rate: If rates have dropped since you first bought, refinancing can reduce your monthly payment and total interest over time.
  • Change the loan term: You might shorten from 30 to 15 years to pay off the house faster, or extend the term to lower monthly payments.
  • Tap home equity: A cash‑out refinance lets you borrow more than you owe and take the difference as cash (often used for renovations, debt consolidation, or big expenses).

Key pros and cons

  • Pros:
    • Lower monthly payment or interest rate.
* Access to cash via equity.

* Ability to switch from an adjustable‑rate to a fixed‑rate mortgage (or vice versa).
  • Cons:
    • Closing costs can be thousands of dollars , so you need to stay in the home long enough to “break even.”
* Extending the loan term can **increase total interest paid** , even if the monthly payment drops.

* A cash‑out refinance **increases your total debt** and can reduce your equity.

Different refinance types

Type| What it does
---|---
Rate‑and‑term| Changes interest rate or loan length, but keeps the same basic loan amount. 37
Cash‑out| Borrows more than you owe; you get cash but owe more overall. 39
Cash‑in| You pay a lump sum to reduce the loan balance and possibly improve terms. 3
No‑closing‑cost| Fees are rolled into the loan or offset by a slightly higher rate. 3

What it means for you personally

If you refinance, your payment history on the old loan “ends” and the new loan starts fresh, which can cause a small, temporary dip in your credit score from the hard inquiry and new account. If you’ve already paid down a lot of principal, resetting the amortization schedule can mean you start paying more interest again early in the new loan, which is why timing and your break‑even point matter a lot.

Information gathered from public forums or data available on the internet and portrayed here.