Refinancing is the process of replacing an existing mortgage with a new one, usually to secure better terms, such as a lower interest rate, shorter loan term, or to access the home’s equity in the form of a cash-out refinance. Homeowners refinance for various reasons, including reducing monthly payments, paying off the loan sooner, or switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Refinance loans can provide significant financial savings, especially when interest rates have dropped since the original loan was taken out.

To qualify for a refinance loan, borrowers typically need a minimum credit score of 620, though higher scores are required for the best rates and loan terms. Lenders will also look at the borrower’s debt-to-income (DTI) ratio, which should ideally be below 45%. Additionally, the borrower should have built up at least 20% equity in their home to avoid paying private mortgage insurance (PMI) with a conventional refinance. For homeowners looking to do a cash-out refinance, where they tap into their home’s equity for cash, lenders usually require at least 20% equity and a solid credit score.

Interest rates for refinance loans are generally lower than those for original mortgages, particularly if the homeowner has improved their credit score or the market rates have dropped. Rates typically range from 4-6%, depending on market conditions, the borrower’s credit profile, and the type of refinance (rate-and-term vs. cash-out). A rate-and-term refinance, which is used solely to lower the interest rate or adjust the loan term, will often have a lower interest rate than a cash-out refinance, which tends to carry a higher rate due to the added risk of borrowing against home equity.

There are no set maximum loan limits for refinance loans; the limit is generally based on the appraised value of the home and the borrower’s ability to repay the loan. However, for cash-out refinances, lenders typically allow homeowners to borrow up to 80% of the home’s appraised value, though some lenders may have more stringent limits. The closing costs for a refinance can range from 2-5% of the loan amount, which can be paid upfront or rolled into the new mortgage. A refinance is a great option for homeowners looking to save money over time or access funds for large expenses, such as home renovations or debt consolidation.