Refinancing
Refinancing replaces your current mortgage with a new one, often to access home equity, consolidate debt or change your terms. Breaking a mortgage early can carry penalties, so it’s worth understanding the full cost first.
Key points
- Refinancing replaces your mortgage with a new one, usually for a different amount, rate or length.
- You can typically borrow up to 80% of your home’s current value when you refinance.
- Breaking your mortgage early usually means a penalty. Always compare it against what you’ll save.
- If your renewal is close, waiting can avoid the penalty entirely.
What is refinancing?
When you refinance, your current mortgage is paid off and replaced with a new one. The new mortgage can be with your existing lender or a different one, and it can be larger than what you owe today. That difference is how people turn home equity into cash.
Refinancing is different from renewing. At renewal you continue the same balance for a new term. When you refinance, you change the balance, the amortization or both, and you have to qualify again.
Why people refinance
Most refinances come down to one of a few goals. Here’s how refinancing helps with each, and what to keep an eye on.
| Goal | How refinancing helps | Watch for |
|---|---|---|
| Renovate or make a large purchase | Turns home equity into a lump sum at mortgage rates | Borrowing more than the project needs |
| Pay off higher-interest debt | Replaces credit card or loan interest with a lower rate | Running the cards back up afterwards |
| Lower your monthly payment | Spreads the balance over a longer amortization | Paying more interest over the long run |
| Change your rate type | Moves you between fixed and variable | Penalty for breaking your current term |
| A life change | Adds or removes someone from the mortgage | Legal costs and requalifying on one income |
How NorthMerit can help
Tell us what you’re planning and we’ll connect you with one licensed mortgage professional who compares lenders for you. It’s free, and there’s no obligation.
How much you can borrow
Most lenders let you refinance up to 80% of your home’s appraised value. Subtract what you still owe, and the rest is the most you could access. You still need to qualify for the new, larger mortgage under the stress test, based on your income and debts.
| Amount | |
|---|---|
| Appraised home value | $800,000 |
| 80% of the value | $640,000 |
| Current mortgage balance | $400,000 |
| Most you could access | $240,000 |
Before penalties and fees, and subject to qualifying.
What it costs to refinance
The biggest cost is usually the prepayment penalty for breaking your current term early. The other costs are smaller, but they add up.
Prepayment penalties
On a variable-rate mortgage, the penalty is usually three months of interest. On a fixed rate, it’s usually the higher of three months of interest or the interest rate differential, often called the IRD. The IRD compares your rate with the lender’s current rate for the time left on your term, and it can be several times larger.
For example, three months of interest on a $400,000 balance at 5% is about $5,000. An IRD on the same mortgage could be much more if rates have dropped since you signed. Ask your lender for an exact quote before you decide.
| Rate type | Usual penalty |
|---|---|
| Variable | Three months of interest |
| Fixed | The higher of three months of interest or the IRD |
Other costs
Expect an appraisal fee, legal fees to register the new mortgage, and a discharge fee if you move to a different lender. Some lenders cover part of these to win your business, so it’s worth asking.
Other ways to use your equity
Refinancing isn’t the only option. Depending on your goal, one of these may cost less.
| Option | How it works | Best for |
|---|---|---|
| Refinance | Replace your mortgage with a larger one | A large, one-time amount |
| Home equity line of credit | Borrow and repay as needed, up to a limit | Ongoing or uncertain costs |
| Second mortgage | A separate loan behind your first mortgage | Avoiding a large penalty on your first mortgage |
| Blend and extend | Your lender blends your current rate with a new one | Borrowing more without breaking your term |
Refinance now, or wait for renewal?
If your renewal is within a few months, waiting usually wins. At renewal there’s no penalty, so you can refinance for only the legal and appraisal costs.
If your renewal is years away, compare the penalty with what you’ll save or gain. Paying off 20% credit card debt can justify a penalty quickly. Shaving a fraction off your rate often can’t. A mortgage professional can lay out both paths side by side.
Common questions
Will I pay a penalty?
How much equity can I access?
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