Refinancing
Refinancing replaces an existing loan with a new one, typically at a lower interest rate, different term, or both. The goal is usually to reduce monthly payments or total interest paid.
To refinance a mortgage, you apply for a new loan (usually with a new lender), which pays off the existing mortgage. Closing costs typically run 2%–5% of the loan amount. The break-even analysis — how long until savings exceed costs — determines whether refinancing is worthwhile.
Rate-and-term refinancing adjusts the interest rate and/or loan length. Cash-out refinancing takes equity from the home as cash, increasing the loan balance. Rate-and-term refinancing almost always makes more financial sense unless you genuinely need the cash.
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- Break-Even Point
- The break-even point is the moment at which total revenue or savings equals total costs — beyond which an action becomes profitable. In refinancing, it's when cumulative savings exceed closing costs.
- Mortgage Payment
- A mortgage payment is the fixed monthly amount owed to a lender, covering principal and interest (P&I). It may also include escrow for property tax and homeowners insurance (PITI).
- Principal
- The principal is the original amount borrowed on a loan, or the outstanding balance still owed — excluding interest. On a mortgage, principal is the portion of each payment that reduces the loan balance.