SFN Blog

How to Refinance Your Mortgage: A Step-by-Step Guide

Refinancing can lower your monthly payment, shorten your loan term, or let you tap equity. It is a real process with paperwork, fees, and trade-offs. This guide walks you through every step in plain language so you can decide if a refi makes sense, and if it does, how to do it right.

The average 30-year fixed rate was 6.58% the week of August 14, 2025, the lowest since October 2024, according to Freddie Mac’s weekly survey. In July 2025, refinances made up roughly four in ten new mortgage applications, per the Mortgage Bankers Association. 

Closing costs are typically 2%–5% of the loan amount, which is why you should calculate a break-even point before you move forward.  Cash-out refis have been a big share of refinances recently as owners draw on equity, according to ICE Mortgage Technology data cited by major news outlets.

Decide Your Goal

Start by picking one primary goal. That choice will guide every other step.

  • Lower payment. Drop your rate or stretch the term back to 30 years.
  • Pay off faster. Refi into a 20-year or 15-year term.
  • Get cash out. Replace your loan with a bigger one and take the difference in cash.
  • Switch rate type. Move from an ARM to a fixed rate for payment stability.

Be clear on the “why.” It keeps you from chasing a small rate drop that won’t help you.

Cash-out note: For conventional loans, Fannie Mae caps most cash-out loans at 80% loan-to-value (LTV) on a primary home. You generally need to leave at least 20% equity in the property after the refi. 

No-cash-out note: A limited cash-out (aka rate-and-term) refi can go much higher on LTV in some cases—up to 97% for certain one-unit primary homes when Fannie Mae owns the existing loan and you meet other guidelines. 

Check Your Current Loan and Credit

Before you shop lenders, open your latest mortgage statement and note:

  • Current interest rate and loan type (fixed or ARM).
  • Remaining term and principal balance.
  • Escrow status (taxes/insurance built into payment).
  • Whether there’s PMI (private mortgage insurance).

Next, look at your credit. Your credit profile drives your refi rate and approval.

  • Scores: Conventional loans are often approved down to 620 with automated underwriting, though higher scores get better pricing. 
  • Debts vs. income: Lenders look at your debt-to-income (DTI) ratio. Many conventional loans can be approved up to 50% DTI through automated systems when the rest of the file is strong. 

If your credit or DTI is borderline, take a month or two to pay down balances, correct errors, or shore up savings. A small score bump can cut your rate or eliminate loan-level pricing hits.

Estimate Your Home Value and Equity

Your equity is what you own free and clear:

Equity = Market Value − What You Owe.

Check recent neighborhood sales on a listing site, then compare to your home’s features. You can also ask a local agent for a quick pricing opinion. For most refis, you’ll either get a full appraisal or, if you fit certain criteria, the lender’s system may offer an appraisal waiver:

  • Fannie Mae calls this Value Acceptance (formerly PIW). 
  • Freddie Mac calls it ACE (Automated Collateral Evaluation).

A waiver can save a few hundred dollars and time, but it’s not guaranteed.

Run the Numbers (Including the Break-even Point)

Refinancing isn’t free. You pay closing costs (more on that soon). Your key test is the break-even point—how long it takes for monthly savings to repay your upfront costs:

Break-even months = Total closing costs ÷ Monthly payment savings

Example: Suppose you owe $300,000 on a 30-year fixed at 7.50%. If you can refi to 6.75%, your monthly principal-and-interest payment drops by about $152. If your all-in closing costs are $6,000, the break-even is about 40 months ($6,000 ÷ $152 ≈ 39.5). If costs are $9,000, it’s about 59 months. If you won’t stay in the home past the break-even month, a refi likely doesn’t pay off.

Heads-up on term reset: If you restart a fresh 30-year clock, you may pay more total interest over time even at a lower rate. You can ask for a shorter term (like 25, 20, or 15 years), or tell the lender to “amortize to remaining term” to avoid a full reset.

Choose the Right Refinance Type

Pick the loan that matches your goal:

  • Rate-and-term (no cash-out). Swap your old rate/term for a new one. This is usually the cheapest refi type and allows higher LTVs when you qualify. 
  • Cash-out. You borrow more than you owe and take the difference. Expect tighter LTV limits (often 80%) and higher rates vs. a no-cash-out loan. 
  • Shorter-term refi (e.g., 15-year). Higher monthly payment, but faster payoff and lower total interest.
  • ARM to fixed. Trade rate risk for stability, especially if your ARM’s fixed period is ending.

Understand Refinance Costs (and How to Manage Them)

Plan for 2%–5% of the loan amount in closing costs. On a $300,000 loan, that’s $6,000–$15,000. Common items include lender fees, appraisal (if needed), title insurance, recording, and prepaid escrow deposits for taxes and insurance. 

Ways to reduce the cash you bring:

  • Roll costs into the loan. Raises your balance; it can still make sense if savings are large.
  • Ask for lender credits. You take a slightly higher rate, and the lender covers some costs. The reverse is also true: discount points let you pay upfront to buy down your rate.
  • Watch for PMI: If your new loan is over 80% LTV, you might need PMI. If you’re below 80%, you may be able to drop the PMI you currently pay.
  • Prepayment penalties: Most standard conforming mortgages do not have them, but check your note. Rules restrict these penalties on many consumer mortgages. 

Shop 3–5 Lenders and Compare Loan Estimates

Rate quotes change daily. Get written Loan Estimates (LEs) from at least three lenders on the same day for a fair comparison. By law, lenders must send an LE within three business days of your completed application. 

Compare:

  • Interest rate and APR (APR reflects some costs).
  • Points and lender credits (Box A on the LE).
  • Third-party fees (appraisal, title).
  • Prepaids and escrow setup.
  • Rate-lock terms (how long the lock lasts and whether extensions cost extra).

When you’re ready, lock the rate. Ask the lender to confirm the lock length and any extension fees in writing.

Gather Documents Once, Use Them Everywhere

Refi paperwork is similar to a new purchase loan. You’ll usually need:

  • Last 30 days of pay stubs.
  • Last 2 years of W-2s (or full tax returns if self-employed).
  • Last 2 months of bank/asset statements.
  • Photo ID.
  • Home insurance (declarations page).
  • Current mortgage statement and HOA info if applicable.

Pro tip: Save all files in one folder with clear names. If you shop with more than one lender, you can reuse the same file set.

Submit Your Application and Lock Your Rate

Complete the online application. Upload documents. When you’re comfortable with a quote and the costs, lock it in.

Many lenders can close a refi in about 30–50 days in normal markets (timelines vary with volume and loan type). You’ll get a Closing Disclosure at least three business days before closing that shows the final numbers; compare it to your LE. 

Appraisal (If Required) and Underwriting

If the system does not issue a waiver, the lender orders an appraisal. Keep the house tidy and make sure the appraiser can access all rooms and the panel/basement.

Meanwhile, underwriting checks your income, assets, credit, and your DTI and LTV against program rules. If questions pop up, answer fast. Speed matters.

If the value comes in low, ask your loan officer about reconsideration of value (provide recent comps) or consider reducing your cash-out amount or changing programs.

Review Your Closing Disclosure Line by Line

You must receive the Closing Disclosure (CD) at least three business days before closing. It lists your final rate, payment, cash to close, all fees, and whether your loan has a prepayment penalty or balloon payment (refis usually do not). The CFPB has a helpful interactive CD to explain each field. 

What to double-check:

  • Rate and term match your lock.
  • Discount points/lender credits are correct. 
  • Escrow setup and prepaids look reasonable.
  • Cash to close is as expected (or “cash from lender” if you’re getting cash-out).

Close and Know Your Three-Day Right to Cancel

For a refinance of your primary home, federal law gives you a three-business-day right of rescission after signing. If you change your mind, you can cancel within that window. (This does not apply to purchase loans or most investment property refis.) 

Funds are disbursed after the rescission period. If you’re doing a cash-out refi, expect the wire after those three business days.

After Closing: Set up Payments and Track Your Savings

Enroll in autopay with the new servicer. Your first payment is often due the second month after closing. Save a copy of your signed promissory note and CD.

Mark your calendar with the break-even month and check that you’re on track. If you used a cash-out refi, keep receipts if you plan to deduct any interest (tax rules are strict; talk to a tax pro).

When Refinancing Does Make Sense

You can lower your rate enough to break even well before you plan to sell. You’re moving from an ARM to a fixed rate to stop future resets. You can drop PMI by getting under 80% LTV. You’re consolidating high-interest debt into a much lower mortgage rate, and you plan to change habits so the debt doesn’t creep back (be careful here).

When Refinancing Does Not Make Sense

It isn’t suitable when your break-even is close to or past your expected move date. You only qualify by adding points or taking a higher rate that erases the savings. Your new loan would require PMI if you do not pay it now. You’re deep into your current amortization schedule, and restarting 30 years would raise your total interest paid significantly.

Final Thought

A refinance is a tool, not a goal by itself. Do the simple math, compare written offers, and line up the loan type with your real-life plans. If your break-even is short and the loan fits your budget, you’re on the right track. If not, wait. Rates move, and you can always revisit the numbers when they do.