Refinancing — Financial Glossary

What is refinancing?

Refinancing means replacing your current mortgage with a new loan. Homeowners refinance to secure a lower interest rate, change the loan term, switch from an ARM to a fixed rate, or tap into home equity (cash-out refinance).

When does it make sense?

A common rule of thumb is that refinancing is worth it if you can reduce your interest rate by at least 0.5% to 1%. However, you should also consider closing costs (typically 2–5% of the loan) and how long you plan to stay in the home.

Break-even calculation

Divide your total refinancing costs by the monthly savings to find your break-even point. If you plan to stay in the home longer than that, refinancing makes financial sense.