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Refinancing means replacing your existing mortgage with a new one — typically to lower your interest rate, reduce your monthly payment, change your loan term, or access your home's equity. Whether refinancing makes sense depends on your current rate, how long you plan to stay in the home, and the costs involved.

Types of Refinancing

When Does Refinancing Make Sense?

• Your current rate is significantly higher than today's rates — a common rule of thumb is that refinancing may be worth considering if you can lower your rate by 0.5% or more, though the actual benefit depends on your loan balance and how long you'll stay in the home
• You want to shorten your loan term — refinancing from a 30-year to a 15-year mortgage builds equity faster and reduces total interest paid, though your monthly payment will increase
• You want to switch loan types — for example, moving from an adjustable-rate mortgage (ARM) to a fixed-rate loan for payment stability
• You want to remove FHA mortgage insurance — refinancing into a conventional loan can eliminate MIP that cannot otherwise be removed
• You need access to equity — a cash-out refinance may make sense for major expenses if your rate will remain competitive

The Break-Even Point

Refinancing comes with closing costs — typically 2–5% of the loan amount. To understand whether it makes financial sense, calculate your break-even point: divide the total closing costs by your monthly savings. If you plan to stay in the home longer than the break-even period, refinancing may be worth it.

What to Expect in the Process

• Credit review and income verification (similar to a purchase loan)
• A new appraisal is typically required to confirm current home value
• Loan underwriting and final approval
• Closing — you'll sign new loan documents and pay closing costs (which can sometimes be rolled into the loan)
• A 3-day rescission period applies on primary residence refinances — the loan funds after this period

Home equity is the portion of your home's value that you actually own — the difference between what your home is worth and what you still owe on your mortgage. As you pay down your loan and as property values rise, your equity grows.

How Equity Builds Over Time

• Monthly payments — each mortgage payment reduces your loan balance, though early payments are mostly interest
• Home appreciation — as market values rise, your equity increases even without paying down the loan
• Down payment — your initial down payment represents immediate equity from day one
• Extra payments — making additional principal payments accelerates equity growth

Ways to Access Home Equity

Private Mortgage Insurance (PMI) is required on conventional loans when the down payment is less than 20%. It protects the lender — not the borrower — in the event of default. The good news: unlike FHA mortgage insurance, PMI on a conventional loan can be removed once you've built enough equity.

How PMI Is Removed on a Conventional Loan

• Automatic cancellation at 78% LTV — by law (Homeowners Protection Act), your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price, based on your scheduled payments
• Request removal at 80% LTV — you can request PMI cancellation in writing once your balance reaches 80% of the original purchase price, even if appreciation has occurred. The lender may require proof of good payment history
• Early removal through appreciation — if your home has appreciated significantly, you may be able to request PMI removal based on a new appraisal showing your current LTV is at or below 80%. This typically requires at least 2 years of on-time payments
• Refinancing — if your home has appreciated and current rates are favorable, refinancing into a new loan with 20%+ equity eliminates PMI entirely

What About FHA Mortgage Insurance?

FHA loans use Mortgage Insurance Premium (MIP) rather than PMI, and the rules are different:

• If your down payment was less than 10%, MIP remains for the life of the loan — it cannot be removed without refinancing
• If your down payment was 10% or more, MIP can be removed after 11 years
• Refinancing from an FHA loan into a conventional loan is often the most practical way to eliminate MIP once sufficient equity is reached

A mortgage recast — sometimes called a loan recast or re-amortization — allows you to make a large lump-sum payment toward your principal balance and have your lender recalculate (recast) your monthly payment based on the new, lower balance. Your interest rate and remaining loan term stay the same — only the monthly payment changes.

How It Works

• You make a substantial lump-sum payment toward your principal (most lenders require a minimum — often $5,000–$10,000 or more)
• You request a recast from your lender or loan servicer
• The lender recalculates your monthly payment based on the reduced balance spread over the remaining loan term
• Your interest rate does not change
• Your loan term does not change
• Your monthly payment goes down

Recasting vs Refinancing — Key Differences

When Recasting Makes Sense

• You received a large sum of money — inheritance, bonus, sale of a property, or other windfall — and want to lower your monthly payment without refinancing
• You recently sold a home and want to apply proceeds to your new mortgage
• Your current interest rate is already low, so refinancing wouldn't improve your rate but you still want a lower payment
• You want to avoid the time, cost, and credit impact of refinancing

A mortgage loan assumption occurs when a buyer takes over the seller's existing mortgage — including its remaining balance, interest rate, and loan terms — rather than obtaining a new loan. If you're a homeowner with a low-rate mortgage, understanding loan assumptions can be a meaningful selling advantage in a higher-rate environment.

Which Loans Are Assumable?

• FHA loans — generally assumable with lender approval; the buyer must qualify based on their own financial profile
• VA loans — assumable, but if assumed by a non-veteran, the seller's VA entitlement remains tied to the loan until it is paid off, which can affect the seller's ability to use their VA benefit again
• USDA loans — may be assumable with lender approval and USDA eligibility requirements
• Conventional loans — generally not assumable due to due-on-sale clauses

What Sellers Should Know

• A low-rate assumable mortgage can be a genuine competitive advantage when listing your home
• The buyer must qualify with the lender — not all buyers will be approved
• The seller is typically released from liability once the assumption is approved, but only with explicit lender confirmation
• VA sellers should carefully consider entitlement implications before allowing a non-veteran assumption
• Assumptions can take 60–90 days or more — longer than a standard transaction

Read the full Mortgage Loan Assumptions guide →