Refinancing your mortgage can be a strategic way to improve your financial position as a homeowner. Whether your goal is to reduce your monthly payment, access home equity, or adjust your loan terms, understanding how a home refinance works is the first step.
This guide breaks down the most common types of home refinance options, including rate-and-term refinance and cash-out refinance, so you can make an informed decision based on your goals.
Overview
Refinancing replaces your current mortgage with a new loan to lower costs, change terms, or tap home equity. The two main options are rate-and-term (to improve rate, term, payment structure, or loan type) and cash-out (to convert equity into cash for uses such as renovations or debt consolidation).
When considering refinancing, compare the potential savings with the closing costs (often 1% to 5% of the loan amount), consider equity and credit requirements, and factor in how long you’ll keep the home. The best strategy aligns with your goals, timeline, and overall financial plan, ideally with guidance from a Loan Advisor.
What Is a Home Refinance?
A home refinance replaces your existing mortgage with a new loan, often with updated terms. Homeowners typically refinance to:
- Lower their interest rate
- Adjust the length of their loan
- Reduce their monthly payment
- Access equity in their home
- Change from an adjustable-rate to a fixed-rate loan, or vice versa
The right refinance strategy depends on your financial goals, your current loan, and how long you plan to stay in your home.
What Is a Rate-and-Term Refinance?
A rate-and-term refinance allows you to modify the interest rate, loan term, or both—without taking cash out of your home.
This type of home refinance is focused on improving the structure of your loan rather than accessing equity.
When a rate-and-term refinance makes sense
Lower your interest rate: If market conditions or your financial profile have improved, refinancing into a lower rate may reduce both your monthly payment and the total interest paid over the life of your loan.
Change your loan term: You may choose to:
- Shorten your loan term, which can help you pay off your home faster and reduce long-term interest costs.
- Extend your loan term to lower your monthly payment and improve cash flow.
Switch loan types: A rate-and-term refinance can help you move from an adjustable-rate mortgage to a fixed-rate loan for stability, or from a fixed-rate loan to an adjustable-rate mortgage if you plan to move or refinance again in the near future.
Remove mortgage insurance: If you have built sufficient equity, refinancing may allow you to eliminate mortgage insurance, which can reduce your monthly payment.
Key consideration
A rate-and-term refinance does not provide access to cash. It is designed to improve your loan terms and overall payment structure.
What Is a Cash-Out Refinance?
A cash-out refinance allows you to refinance your existing mortgage for more than you currently owe and receive the difference in cash. This option uses your home equity as a financial resource.
How a cash-out refinance works
If your home has increased in value or you have paid down a portion of your mortgage, you may have built equity. A cash-out refinance converts a portion of that equity into funds you can use.
The new loan pays off your existing mortgage, and the remaining balance is provided to you at closing.
Common uses for a cash-out refinance
A cash-out refinance is often used to support larger financial goals, such as:
Home improvements and renovations: Investing in your home may increase its value while improving your living space.
Debt consolidation: Homeowners may use a cash-out refinance to consolidate higher-interest debt into a single payment.
Education expenses: Funds can be used to support tuition or other long-term investments.
Real estate or financial investments: Some borrowers leverage equity to invest in additional properties or other opportunities.
Major or unexpected expenses: A cash-out refinance can provide access to funds for significant life events or financial needs.
Key considerations
- Your loan balance will increase.
- Your home is used as collateral.
- Most programs require you to retain some equity in your home.
- Closing costs apply, similar to your original mortgage.
A cash-out refinance can be a powerful financial tool when aligned with long-term financial planning.
Common Reasons to Consider a Home Refinance
Lower interest rates
Refinancing into a lower interest rate may reduce your monthly payment and the total cost of your loan over time. It is important to evaluate whether the savings outweigh the refinancing costs.
Shortening the loan term
A shorter loan term can help you build equity faster and reduce the amount of interest paid over the life of the loan.
Lower monthly payments
Extending your loan term or securing a more favorable rate may improve your monthly cash flow.
Changing loan types
Refinancing allows you to move between adjustable-rate and fixed-rate loans based on your financial strategy and market conditions.
Accessing home equity
A cash-out refinance provides access to funds for a variety of financial needs and goals.
What Does It Cost to Refinance a Home?
Refinancing includes many of the same costs as your original mortgage, such as:
- Appraisal
- Title search
- Lender and application fees
Closing costs typically range from 1% to 5% of the loan amount, depending on your location and loan structure.
Before moving forward, it is important to compare these costs against the potential financial benefits of your refinance.
What Is a Lender-Paid Refinance?
A lender-paid refinance is a type of home refinance where the lender covers some or all of your upfront closing costs in exchange for a slightly higher interest rate on the loan.
Instead of paying out of pocket for expenses like appraisal, title, and lender fees, those costs are offset through the loan’s structure.
How a lender-paid refinance works
In a traditional refinance, closing costs are either paid out of pocket or rolled into the loan balance. With a lender-paid refinance, the lender provides a credit that covers those costs, allowing you to complete the refinance with little to no upfront expense.
This approach can make refinancing more accessible, especially if you prefer to preserve cash on hand.
When a lender-paid refinance may make sense
A lender-paid refinance can be a strategic option in several scenarios:
You don’t plan to stay in the home long-term: If you expect to sell or move within a few years, paying upfront closing costs may not provide enough time to recoup the savings. A lender-paid refinance allows you to take advantage of a lower rate or improved loan terms without a significant upfront investment.
You want to take advantage of current market opportunities: If interest rates improve, a lender-paid refinance can help you act quickly without needing to bring cash to closing. This can be especially beneficial in a changing rate environment.
You expect rates may continue to change: If you believe rates could decrease again in the future, a lender-paid refinance may allow you to secure a better rate now while keeping the option open to refinance again later—without having paid substantial upfront costs.
You prefer to preserve cash flow: Keeping cash available for other priorities—such as home improvements, investments, or emergency savings—can be an important consideration for many homeowners.
Key considerations
- The interest rate may be slightly higher compared with a refinance, where closing costs are paid upfront.
- Long-term savings should be evaluated against the higher rate.
- This strategy is often most beneficial for shorter time horizons.
Why homeowners choose a lender-paid refinance
A lender-paid refinance offers flexibility. It can help homeowners take advantage of a home refinance opportunity without the barrier of upfront costs, while still aligning with their financial goals and timeline.
As with any refinance option, it is important to evaluate how long you plan to stay in your home and how the loan structure supports your overall strategy.
How to Know if a Home Refinance Is Right for You
A home refinance should align with your overall financial goals. Consider the following:
- Your current interest rate and loan terms
- Your available home equity
- Your long-term plans for the property
- Whether your goal is payment reduction, equity access, or loan restructuring
You can run the numbers yourself by using our refinance calculator here. If you have questions or want to explore your options, we recommend connecting with an APM Loan Advisor who can help you evaluate your options and determine the most effective strategy.
A home refinance can provide flexibility, improve your financial outlook, and help you make the most of your homeownership investment.
Whether you’re considering a rate-and-term refinance to optimize your loan or a cash-out refinance to access your equity, the key is to choose a strategy that supports your long-term goals.
Frequently Asked Questions About Home Refinance
What is the difference between a rate-and-term refinance and a cash-out refinance?
A rate-and-term refinance adjusts your interest rate, loan term, or both without providing cash back. A cash-out refinance allows you to access your home equity and receive funds at closing.
How much equity do I need for a cash-out refinance?
Home equity requirements vary by loan program, but most require you to maintain a portion of equity in your home after refinancing.
Does refinancing affect your credit score?
Refinancing may result in a temporary decrease in your credit score due to a credit inquiry. Long-term impact depends on how the new loan is managed.
How long does the refinance process take?
Most home refinance transactions take approximately 30 to 45 days, depending on the loan type and documentation requirements.
When is the right time to refinance?
The right time to refinance depends on your financial goals. Homeowners typically refinance when they can improve their loan terms, reduce their payment, or access equity in a meaningful way.
Can I refinance if I have unique financial circumstances?
There are a variety of loan programs designed to meet different borrower needs. If your situation is not traditional, it’s still worth exploring your options with an APM Loan Advisor.
*Refinancing may result in finance charges that may be higher over the life of the loan. Consult with your loan advisor for details.
