A mortgage refinance involves replacing your existing home loan with a new mortgage for the same property. The funds from your new mortgage are used to pay off your existing loan, and you start making mortgage payments on the new one instead.

There are many reasons to refinance your mortgage loan. You may want to reduce your interest rate, lower your monthly mortgage payment, avoid paying mortgage insurance premiums, or borrow from the equity you’ve built up in your real estate.

Here’s when you might want to consider a refinance — and how to make it happen.

Dig deeper: Is now a good time to refinance your mortgage?

5 reasons to refinance your mortgage

Refinancing can help you achieve many goals. Here are five that may fit your situation:

1. Get a lower rate or payment

If current mortgage rates are lower than the rate on your existing mortgage, you may save money by refinancing to a lower interest rate. Your monthly payment may also be lower.

The free Yahoo Finance mortgage calculator could help you estimate how much of your monthly payment would be applied to principal and interest with a lower rate. You can also use a refinance calculator to determine if refinancing is the right move. This requires calculating the break-even point — or the amount of time before the refinance saves you more than it cost.

Learn more: What is a cash-in refinance?

2. Switch from an adjustable-rate loan to a fixed-rate loan (or vice versa)

A fixed interest rate protects you from rate fluctuations that could trigger a higher payment with an adjustable-rate mortgage. An adjustable rate can give you a lower payment for an initial set period, after which your payment may increase if rates move higher.

Dig deeper: Adjustable-rate vs. fixed-rate mortgage: Which should you choose?

3. Change your repayment period

With a shorter term, such as 15 years instead of 30, your payment typically will be higher, but you should pay less interest expense over the lifetime of your loan. With a longer term, say 30 years instead of 15, your payment typically will be lower, but you'll probably pay more interest expense over your loan's lifetime.

4. To stop paying for private mortgage insurance (PMI)

Some types of loans allow borrowers to cancel their private mortgage insurance (PMI) when they have enough equity in their home. If your loan doesn't allow cancellation of mortgage insurance at any level of equity, you'll have to refinance into a new loan to stop paying for it.

5. Add or remove a borrower

A change in personal or family circumstances, such as a divorce between co-homeowners or an inheritance, may make refinancing necessary to update who's responsible for repaying the loan.

Learn more: 5 ways to prepare for your mortgage refinance

One reason not to refinance

One time when you may not want to refinance is when you're planning to sell your home in the next few years. In that case, the benefits of refinancing may not outweigh the costs and the time involved to complete the refinance process.

3 types of mortgage refinances

There are three types of mortgage refinance options you might consider. The right choice depends on your goals, your budget, how much home equity you have, and other factors. Your three loan options include:

1. Rate-and-term refinance

A rate-and-term refinance occurs when your new loan amount equals your current loan's outstanding balance. Your rate, repayment term, or other aspects of the loan may be changed. You may also change from your current lender to a new one.

2. Streamline refinance

A streamline refinance occurs when you replace your current loan with a new loan of the same type and the paperwork and documentation requirements are simplified.

Three types of loans that allow streamline refinancing are FHA loans that are insured by the Federal Housing Administration (FHA), VA loans that are insured by the U.S. Department of Veterans Affairs (VA), and USDA loans that are insured by the U.S. Department of Agriculture (USDA).

Read more:

• FHA streamline refinance

• VA streamline refinance (VA IRRRL)

• USDA streamline refinance

3. Cash-out refinance

A cash-out refinance loan is when your new loan amount is significantly higher than your current loan's outstanding balance and the difference is paid to you in cash. This type of refinance reduces your equity in your home, but allows you to use the cash for home improvements or other expenses.

Read more:

• FHA cash-out refinance

• VA cash-out refinance

Costs to refinance your mortgage

Refinancing isn't free. As with your first loan, these come with closing costs — things like an appraisal fee, loan origination fee and title search and insurance costs.

One type of fee that you may encounter when you refinance is optional. It's called a "buydown" or “discount points” and it's a strategy for lowering refinance rates. If you elect to pay it, you should receive a lower mortgage interest rate for an initial period for your new loan.

Some borrowers choose to pay these upfront costs in cash. Others prefer to wrap the costs into their loan through a higher loan amount or a higher interest rate. Which option you choose may depend on your personal financial situation and how much cash you have available.

Learn more: How a no-closing-cost refinance works

Shop around to save when you refinance

Regardless of your reasons for refinancing, you should shop around for your lender. Fill out a loan application with several refinancing lenders, and compare quotes to find the lowest rates available to you. The rates and fees you'll be quoted will depend on your income, your credit score, your loan term, the type of loan you want, your desired loan amount, and your home's current value, among other factors. Keep in mind that qualifying and underwriting requirements will vary from lender to lender too.

Read more: How soon can you refinance your mortgage?

What is refinancing a mortgage?

Refinancing a mortgage means replacing your original one with a new one — one that could have different terms or rates. You then use the funds from your new mortgage to pay off your old one.

Is it a good idea to refinance a mortgage?

Refinancing a mortgage can be a good idea if it will help you financially. For example, if you can get a lower mortgage rate by refinancing, you could save money on your monthly payments and pay less in interest in the long run. But it usually isn't a good idea to refinance if you plan to move soon because the amount you save probably won't make up for the amount you pay up-front in closing costs.

Is it hard to refinance a mortgage?

It can be hard to refinance a mortgage if you're in a tough financial spot because you might not get the terms you want. Otherwise, refinancing isn't necessarily harder than getting your original mortgage. Lenders will require a certain credit score, loan-to-value ratio (LTV), and debt-to-income ratio (DTI), though these vary by company and loan program.

Does refinancing hurt your credit?

Refinancing your mortgage may hurt your credit in the beginning, as it requires a hard credit inquiry and, sometimes, increases your debts. This ding is usually temporary, though, and as long as you make on-time payments each month, it should improve your credit score over time.

How long does the mortgage refinance process take?

It depends on the mortgage lender, but refinancing typically takes about four to six weeks. As of early June 2024, the average closing time for a refinance was 43 days, according to ICE Mortgage Technology.