Definition
Replacing an existing loan with a new one, usually to get a lower rate, change the term, or take cash out of home equity.
What it means
Refinancing pays off your current loan with a new loan. People refinance mortgages to lower the interest rate, switch from an adjustable to a fixed rate, shorten the term, drop FHA mortgage insurance, or take cash out of their home equity. A refinance comes with closing costs, a new Loan Estimate and Closing Disclosure, and usually a credit check and appraisal. A simple test is the break-even point: divide total closing costs by the monthly savings to see how many months it takes to recover them. Restarting a 30-year term can lower payments but add interest over time. For refinances of your main home with a new lender, federal law usually gives a three-day right to cancel. Auto and student loans can be refinanced too.
Example
Refinancing a $280,000 balance from 7.5% to 6.25% lowers the monthly payment from about $1,958 to about $1,724, saving about $234. With $6,000 in closing costs, break-even is about 26 months.
Illustrative numbers only. Your situation will differ.