How to refinance a mortgage

By David Chen · Published October 3, 2026

A refinance replaces one loan with another. That sounds like a narrow, mechanical transaction, and most of the marketing around it treats it as one: a lower rate, a lower payment, a decision that makes itself. The part that gets left out is that the new loan also restarts the calendar, and the calendar is where a large share of the money lives.

The numbers below are all from one loan: $300,000 at 6.50% over 30 years, payment $1,896.20, total interest $382,633. We refinance it at the ten-year mark, when the balance stands at $254,328.

The same balance, four different decisions

Rates have fallen to 6.00%. Here is what happens to the payment and to the interest bill across the two loans put together:

Read the first two rows together. The rate falls by half a point, the payment falls by $371.38 a month, and the interest you pay over the life of the borrowing rises by $93,849. Nothing about the rate was a trick. The term went back to 30 years, so the balance you still owe gets charged interest for another three decades instead of the two that remained.

Then read the third row. Taking a shorter term at the same 6.00% also lowers the payment — by $74.12 — and lowers the total interest by $17,788. Both of the things people want from a refinance are available at once; the 30-year version gives up the second one in exchange for a bigger version of the first.

Why the balance had barely moved

Ten years of payments is $227,544 out of your account on this loan. Here is where it went:

Four dollars of interest for every dollar of principal. This is why the term matters so much: a refinance does not write off the balance, it re-borrows it, and it re-borrows it at the point in the schedule where interest is most expensive. Refinancing to save $371.38 a month is not a saving on the loan as it stands; it is a purchase of lower monthly cash flow, paid for with a longer interest bill.

A cash-out refinance has a second price

A cash-out refinance borrows more than you owe and hands you the difference. It is a rate-and-term refinance plus a new loan rolled into your mortgage, and the new loan is usually the longest, cheapest -looking way to borrow. Priced here at 6.50% over 30 years so that the only thing changing is the amount:

The $50,000 costs $63,772 in interest if the loan runs its full term. That is not automatically a bad price for money — but it is a price, and it is easy to lose sight of it when the only visible change is the payment going up by $316.03. It is also worth knowing that cash-out pricing is often a little worse than rate-and-term pricing on the same day, so the comparison that matters is against the rate you are actually offered for the cash-out version, not the one quoted for the plain refinance.

The costs, and how long they take to earn back

A refinance is not free. Lender fees, title, appraisal, recording and the rest typically land somewhere around 2% of the loan, which on this balance is about $5,087. Divide that by the monthly saving and you get the number of months you have to stay for the refinance to have paid for itself:

• Against the 30-year term: $371.38 a month, so about 14 months. Fast — but this is the version that adds $93,849 of interest, so a short break-even is not the recommendation it looks like.
• Against the 20-year term: $74.12 a month, so about 69 months, or a little under six years. Slower, and the version that actually reduces what the borrowing costs.

The arithmetic behind the break-even month has its own guide — see refinance break-even point — and the individual fees are broken down in closing costs explained. What matters for this decision is the shape: a fast break-even is a statement about how long you must stay, not about whether the loan is cheaper.

What a refinance actually involves

The paperwork is similar to a purchase, minus the purchase contract. Most of it is a document collection exercise rather than a decision, and starting it early is what keeps the timeline short:

• Income and employment evidence — recent pay statements, and tax returns if you are self-employed or have variable income.
• The current loan statement, so the payoff figure can be requested and quoted accurately.
• Insurance and tax information for the property, since both are usually collected monthly alongside the payment.
• An appraisal, unless the loan is one that waives it. What you owe is known; what the property is worth is the part that has to be established, and it is what sets the loan-to-value ratio the pricing depends on.
• The rate lock terms — how long the quoted rate is held, and what happens if the closing slips past that date.

You will also be asked about debts, since a refinance is a new underwriting decision and the debt-to-income ratio is calculated again from scratch. A loan that was approved three years ago with different debts in the file is not automatically approved now.

When not to refinance

• You will move before the break-even. The costs are paid on day one and recovered monthly. Selling in year two hands those costs to a loan you no longer have.
• The only gain is the payment. If the rate is barely below what you have and the term goes back to 30 years, you have bought cash flow and sold the payoff date. Sometimes that is the right trade — a forced one, for example — but it should be named as the trade it is.
• You are near the end of the loan. Late in the schedule most of each payment is already principal, so the interest on the remaining balance is small. Re-borrowing puts the expensive years back in front of you.
• You are rolling in other debt without changing the behaviour. Moving a balance onto a mortgage at a lower rate is real arithmetic — but it also converts unsecured debt into debt secured against your home, and it converts a five-year repayment into a thirty-year one.

To see the effect on your own numbers, the amortization schedule shows the month interest stops outweighing principal, the mortgage calculator prices any term and rate you like, and 15-year vs 30-year mortgage covers the term decision on its own.

The short version

A refinance changes two things, and the rate is the one everyone talks about. On a $254,328 balance, moving from 6.50% to 6.00% over a fresh 30 years lowers the payment by $371.38 and raises the total interest by $93,849. The same rate over a 20-year term lowers the payment by $74.12 and reduces total interest by $17,788. Ask for the term that matches the time you actually have left, price the closing costs against the monthly saving, and treat a cash-out as a separate loan that happens to share a closing.

Frequently asked questions

This guide is educational and is not financial advice. Figures were produced by our calculator and independently recomputed before publication; your lender's own documents govern your loan. Spot an error? Tell us — see also our disclaimer.