Refinance
Also known as: Refi
Replacing an existing loan with a new one — typically to lower the rate, change the term, switch from variable to fixed rate, or extract equity (cash-out refinance). Subject to closing costs that must be recouped through the rate savings to make the refi worthwhile.
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Refinancing is the process of taking a new loan to pay off an existing one, with the new loan replacing the old loan's obligation. For mortgages, refinancing involves a full loan origination process — application, underwriting, appraisal, title work, closing — with the new loan paying off the original mortgage at closing. The borrower then has a new loan with new terms: typically a lower rate, possibly a different term length, possibly a different product type (fixed vs ARM, conventional vs FHA), and possibly a different principal balance if cash-out refinancing.
The economic case for refinancing rests on the spread between the old rate and the new rate, applied to the loan balance over the time remaining. A borrower with $300,000 remaining on a 7.00% mortgage who refinances to 6.00% saves approximately $200 per month in interest. Refinancing costs (origination fee, appraisal, title insurance, closing costs) typically run $3,000 to $6,000 on a typical refinance. The break-even is mechanical: divide closing costs by monthly savings to get the number of months to recoup the costs. On $200 in monthly savings and $4,000 in closing costs, the break-even is 20 months. The borrower who stays in the loan past month 20 is net ahead; the borrower who sells or refinances again before month 20 has lost money on the refi.
Cash-out refinancing extracts home equity by taking a new mortgage larger than the existing balance, with the borrower receiving the difference in cash at closing. The math is different from a rate-and-term refi because the borrower is now paying interest on the cashed-out amount at the mortgage rate, which is usually lower than alternative borrowing rates (HELOC, personal loan) but extends the cash-out balance over the full mortgage term. The strategic case for cash-out refi is using the funds for a higher-ROI purpose than the interest cost (typically home improvement that adds value, occasionally debt consolidation away from high-rate credit card debt). Using cash-out funds for consumption — vacations, cars, lifestyle spending — converts unsecured spending into long-term mortgage debt and is generally bad math.
Student loan refinancing is a meaningful subset of the refi market with distinctive considerations. Federal student loans carry protections — income-driven repayment, Public Service Loan Forgiveness eligibility, generous deferment and forbearance, death and disability discharge — that private refinance lenders cannot offer. Refinancing a federal student loan into a private one forfeits those protections in exchange for a typically lower rate. For high earners with stable employment outside PSLF pathways and no realistic possibility of needing federal protections, private refinance can save substantial interest. For most other borrowers, the federal protections are worth more than the rate spread, and refinancing destroys option value. The student loan refi calculator quantifies both sides.
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- Mortgage A loan secured by real estate, used to finance the purchase or refinance of a home. The largest single loan most US households will ever take, typically with a 15- or 30-year amortization, fixed or adjustable rate, and various government-backed or conventional structures.
- Origination fee A lender fee charged at the time of loan origination, typically expressed as a percentage of the loan principal (commonly 0.5% to 2.0% on mortgages, 1% to 8% on personal loans). Included in APR but not in the headline interest rate.
- APR (Annual Percentage Rate) APR is the annualized cost of borrowing, expressed as a percentage, that includes both the nominal interest rate and certain mandatory fees. For credit cards, it is essentially the interest rate; for installment loans, it bundles in origination fees and points.
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