What Is Refinancing?

How Does Refinancing Work?

Refinancing is a process in which you get a new loan to replace an old one, ideally with a better rate. Here's a look at how refinancing works:

• Before you apply: Check your credit report and take inventory of your finances to get a sense of what lenders will see.
• Application process: You'll go through the same application process that you would for a home purchase mortgage or other type of debt, including a credit check. It's a good strategy to rate shop with multiple lenders to get the best interest rate. Some lenders may allow you to get prequalified, which lets you check your rate without a hard inquiry.
• Underwriting: Once you submit a formal application, a lender will review your qualifications to determine whether to approve your loan. They'll also determine your rate, terms and how much you can borrow.
• Approval: This period is called closing if you're refinancing a mortgage. Once the loan is approved, you'll get your loan documents and have the opportunity to review the final loan amount and terms before you sign your agreement.
• Pay off your old loan: Typically, the new lender pays off your old loan directly. If you're doing a cash-out refinance, you'll get your funds through a check or a wire transfer.

Compare mortgage refinance rates

Check today’s refinance offers and current rates to find the right loan to lower payments or shorten your term.

Tip: Refinancing typically makes the most sense if rates have come down since you first took out the loan or if your credit is higher now and can unlock a substantially lower interest rate.

How Long Does Refinancing Take?

Depending on the type of debt, refinancing could take anywhere from a few days to a month or more. Refinancing an auto loan may only take a couple weeks, for example, while refinancing a mortgage is a lengthier process that could take around 50 days.

Learn more: When Should You Refinance Your Mortgage?

Types of Refinancing

Refinancing may broadly fall under these types, each with different aims:

• A rate-and-term refinance replaces an old loan with a new loan that has better terms, such as a lower interest rate. The goal is typically to save money.
• A cash-out refinance is when you take out a new loan that's higher than your current loan's balance to tap into your equity. You use the new loan to pay off the old one, and keep the difference.
• A cash-in refinance can be a good strategy if you have a lump sum of cash you want to put toward your debt, such as your home. You put your money toward your balance and then take out a new, smaller loan with new terms. This can help you qualify for lower rates and get out of debt sooner.

How Does Refinancing Affect Your Credit?

Refinancing can impact your credit in a number of ways, depending on your credit profile and how you manage the loan.

• Hard inquiries: Applying for a new loan can cause a small, temporary dip in your score. Applying for multiple loans can amplify the effect, but rate shopping within a short window (14 days to be safe) helps avoid unnecessary damage.
• Closing an account: When you refinance, you close your old loan and open a new one. That adds a new account to your credit report, which can lower the average age of your credit and lead to a modest dip.

Tip: The initial application process could have a temporary negative effect on your credit, but refinancing into a loan that better meets your needs—particularly if it means you'll be able to make all your payments on time—can help scores in the long run.

Learn more: How Does Refinancing Affect Your Credit Score?

Pros and Cons of Refinancing

Here are some pros and cons of refinancing to consider before you decide whether it's a good option for you.

Learn more: How Does Refinancing Save You Money?

Refinancing by Loan Type

Here are some examples of what refinancing can look like for a variety of debt types.

Refinancing a Mortgage

Refinancing a mortgage is when you take out a new home loan to pay off your old one. This could help you cash out equity or get a better rate. Refinancing your mortgage typically makes the most sense if rates are lower than when you bought.

Tip: You can use home equity to renovate your home, pay off other debts or fund large purchases. But there are downsides to tapping into equity, such as the risk of becoming underwater on your loan.

Refinancing an Auto Loan

An auto loan refinance is when you take out a new loan to pay off the balance on your existing auto loan. The goal is typically to lower your interest rate to reduce your overall interest costs, or to lower your monthly payments to make repayment easier to manage. For example, you could choose to refinance your auto loan when rates are down or if your credit score has improved, which could help you access better terms.

You may also refinance to an auto loan that has a shorter repayment term if you'd prefer to finish paying off your loan sooner rather than later. A shorter repayment term will usually increase the amount of your monthly payment, however.

Learn more: Should I Refinance My Car?

Refinancing Student Loans

Refinancing student loans usually means taking out a private student loan to repay your federal loans. If you have good credit, refinancing may bring you savings. But refinancing federal student loans means forfeiting the protections and benefits federal loans offer, including student loan forgiveness programs and income-based repayment.

Refinancing Credit Card or Personal Loan Debt

Refinancing credit card debt or personal loan debt usually means taking out a debt consolidation loan, a type of personal loan you use to pay off one or more of your credit balances. Because credit card balances and personal loans sometimes come with high APRs, consolidating using a loan with a better rate can make a big difference in making repayment more manageable.

Example: If you have a personal loan with a 16% interest rate and you're able to qualify for one with a 12% interest rate, you could refinance the debt by taking out the 12% rate personal loan and using it to repay the original personal loan.

If you are looking to refinance a three-year, $10,000 personal loan in this way, you're looking at trading monthly payments of $352 and a total of $2,657 in interest for monthly payments of $332 and total interest payments of $1,957. That saves you $700 overall and $20 per month.

Frequently Asked Questions

The Bottom Line

Be it a personal loan, mortgage, auto loan, student loan or other debt, refinancing could help you accomplish a range of goals. It's always a good idea to weigh your options before you refinance, and get a sense of the options available to you before you decide to proceed.

Before you decide to refinance, check your FICO^® Score^Θ for free through Experian. Your credit scores have an impact on how easy it will be to qualify for a new loan, as well as the rates and terms you may receive.