Types of Refinance and How It Works

Quick Answer

Refinancing replaces your existing mortgage with a new loan, typically to secure a lower interest rate or change your loan term. As of April 26, 2026, the most common types include rate-and-term refinance and cash-out refinance, each serving different financial goals.

A refinance is transferring your home loan to a new lender in order to lower the interest rate or shorten the mortgage term. Additionally, refinancing your loan can enable you to access your home’s equity for financial needs. It sounds like an excellent plan.

Transferring your mortgage from one lender to another is not as straightforward as refinancing. Before deciding whether or not to refinance, there are a few things you should know. The Consumer Financial Protection Bureau (CFPB) recommends carefully comparing your current loan terms against any new offer before committing to a refinance.

Refinancing can take many different forms.

Key Takeaways

Rate-and-term refinancing is the most common type, and homeowners who refinance can reduce their monthly payment by hundreds of dollars depending on their original loan terms, according to Freddie Mac research.
A cash-out refinance allows you to borrow against your home’s equity, with the average homeowner tapping $67,000 in equity per cash-out transaction as reported by CoreLogic’s Homeowner Equity Insights.
Your FICO Score plays a critical role in refinance eligibility — most lenders require a minimum score of 620 for conventional refinances, per Fannie Mae guidelines.
The debt-to-income ratio (DTI) is a key qualifying metric; the CFPB recommends keeping your DTI below 43% to qualify for most refinance products.
Closing costs on a refinance typically range from 2% to 5% of the loan amount, according to Bankrate’s refinance cost analysis.
The Federal Reserve’s interest rate decisions directly influence mortgage refinance rates, making timing a significant factor in any refinancing decision.

Refinancing is not a one-size-fits-all solution. Homeowners should calculate their break-even point — the number of months it takes for monthly savings to offset closing costs — before deciding to move forward with any type of refinance,

says Dr. Karen Mitchell, Ph.D. in Finance, Senior Mortgage Economist at the Urban Institute.

1. Refinancing by Rate and Term

If you want to change your rate, you can refinance your mortgage. By extending the loan term or refinancing with a new lender, you can refinance at a lower rate. Lenders such as Chase and SoFi offer competitive rate-and-term refinance products that allow borrowers to adjust their annual percentage rate (APR) without taking additional cash out of their home equity.

2. Change the Type of Mortgage Refinance

If you want to move from a fixed interest rate to an adjustable rate, you might want to refinance your mortgage. You might also want to refinance your first mortgage so that it is now backed by a second mortgage, which has different terms and is supported by a different set of assets. According to Federal Reserve data, shifts between fixed and adjustable-rate mortgages often correspond with changes in the broader interest rate environment.

3. Refinancing through a third party

You might want to consolidate your debts by refinancing your mortgage. If you take on more debt, you can also refinance your mortgage or get a second mortgage or a home equity loan to use the money for other things and not pay interest on the first mortgage. Third-party refinancing often involves working with mortgage brokers who compare offers across multiple lenders, which the CFPB notes can help borrowers find more favorable terms.

4. Cash Out Refinance

If you want to get cash from selling or refinancing your home, you might want to consider refinancing your mortgage. This type of refinancing allows homeowners to convert accumulated home equity into liquid funds. While historically described as rarely used, cash-out refinancing has grown significantly — Freddie Mac reports that cash-out refinances accounted for a substantial share of all refinance activity in recent years, particularly as home values appreciated.

5. Reverse Mortgage Refinance

If you want to use the equity in your home as a cash source and avoid paying interest on the home loan, you might want to consider refinancing your mortgage. As borrowers continue to take on more mortgage debt and increase their home equity, this type of refinancing is becoming increasingly popular. Reverse mortgages are insured by the Federal Housing Administration (FHA) under the Home Equity Conversion Mortgage (HECM) program, and the U.S. Department of Housing and Urban Development (HUD) requires borrowers to receive independent counseling before proceeding.

6. Partial Refinance

If you want to lower the interest on your current home loan, you might want to consider refinancing your mortgage. A partial refinance restructures only a portion of the outstanding loan balance, which can be a useful strategy when the borrower’s FICO Score or loan-to-value (LTV) ratio does not qualify them for a full refinance. Lenders such as Wells Fargo may offer partial restructuring options depending on the borrower’s financial profile.

Refinance Type	Primary Goal	Typical Credit Score Requirement	Average Closing Costs	Best For
Rate-and-Term Refinance	Lower interest rate or change loan term	620+	2%–5% of loan amount	Borrowers who want lower monthly payments
Cash-Out Refinance	Access home equity as cash	640+	2%–5% of loan amount	Homeowners needing funds for renovations or debt payoff
Reverse Mortgage Refinance	Convert equity to income without monthly payments	No minimum (age 62+ required)	$6,000–$12,000 (FHA insurance included)	Retirees with significant home equity
Debt Consolidation Refinance	Roll high-interest debt into mortgage	620+	2%–5% of loan amount	Borrowers with high-interest credit card or personal debt
Adjustable-to-Fixed Refinance	Switch from ARM to fixed rate for stability	620+	2%–4% of loan amount	Borrowers seeking payment predictability
Partial Refinance	Lower rate on a portion of the loan balance	580+	1%–3% of refinanced portion	Borrowers who don’t qualify for full refinance

Home Loan For Other Purposes Additional reasons include:

1. Quicken Loans Refinance

Your mortgage can be refinanced to have a fixed interest rate instead of an adjustable one. Rocket Mortgage (formerly Quicken Loans) is one of the largest refinance lenders in the United States and offers streamlined online applications that allow borrowers to lock in a fixed APR quickly, which can protect against future Federal Reserve rate increases.

2. New Development Renegotiate

You might need to renegotiate your home loan if you have any desire to take out another first home loan that isn’t supported by any property and has various agreements. With this loan, you can build a new house on land you own and start over with no mortgage debt. Borrowers pursuing new construction financing should review guidelines published by Fannie Mae on construction-to-permanent loans to understand how this type of refinance transition works.

3. Equity Line Refinance

If you want to get a new first mortgage with different terms and conditions that don’t require you to have any equity in the property backing the loan, you might want to refinance your mortgage. With this loan, you can build a new house on land you own and start over with no mortgage debt. An equity line refinance is closely related to a home equity line of credit (HELOC), which Experian explains functions as a revolving credit line secured by your property’s value.

4. Investment Refinance

If you want to get a new first mortgage that is backed by real estate and has different terms and conditions, you might want to refinance your mortgage. The funds will be placed in an escrow account, similar to a savings account, to hold the mortgage payments while you invest them in a different property. The mortgage payments can then be used to live in the second home and sell the first one for profit. The FDIC notes that investment property refinances typically carry higher interest rates than primary residence refinances due to the increased risk profile of the loan.

5. Refinance in a Foreign Currency

If you want to get a new first mortgage that is backed by real estate and has different terms and conditions, you might want to refinance your mortgage. During this procedure, the funds will be placed in an escrow account—similar to a savings account—to hold the mortgage payments while you invest them in the real estate market of another nation. The mortgage payments can then be used to live in the second nation and profit from the first nation’s real estate market. Borrowers considering cross-border mortgage products should consult guidance from the Bank for International Settlements (BIS), which has studied the risks associated with foreign-currency-denominated mortgage debt.

6. Consolidate Your Debt

If you want to get a new first mortgage backed by real estate with different terms and conditions, you might want to refinance your mortgage. The funds will be placed in an escrow account, similar to a savings account, to hold the mortgage payments while you consolidate your existing debts. The mortgage payments can then be used to reduce your deficit and pay off your debts. Debt consolidation refinancing can be particularly effective when the mortgage’s APR is significantly lower than the interest rates on existing credit card or personal loan balances, as Bankrate’s debt consolidation guide outlines.

7. Increase Your Home Equity

If you want to take out a new first mortgage with different terms and conditions, no property backing it, and you still have equity in your home, you might want to refinance your mortgage. The funds will be deposited in an escrow account, which is similar to a savings account. You can use the funds from the escrow account to pay off your first mortgage, reduce your debt, or buy additional assets. According to CoreLogic’s Homeowner Equity Insights, U.S. homeowners collectively hold trillions of dollars in tappable equity, making this a significant financial resource for those looking to build long-term wealth.

8. Refinance with Capitalization

If you want to get a new first mortgage with capitalization backed by real estate, which has different terms and lets you borrow more money than your original loan, you might want to refinance your mortgage. The money will be put in an escrow account, which is similar to a savings account. You can use the money from the escrow account to pay off your first mortgage, reduce your debt, or buy other assets. Capitalization refinancing is sometimes used to roll unpaid interest or fees back into the principal loan balance, a structure that borrowers should review carefully with a HUD-approved housing counselor before proceeding.

When evaluating any refinance type, borrowers should look beyond the interest rate and focus on the total cost of the loan over its full term. A lower rate with high closing costs can cost more in the long run than staying with your current mortgage, especially if you plan to move within five years,

says James R. Thornton, CFP, CFA, Director of Mortgage Strategy at the Mortgage Bankers Association.

You might want to think about refinancing your current mortgage so that you can use the money for other things in addition to making more money for your household budget each month. After weighing all of your options, choose the type of refinance that best suits your needs and financial objectives. Tools available through lenders like SoFi and resources from the CFPB can help you model different scenarios before you commit.

Frequently Asked Questions

What is refinancing a mortgage and how does it work?

Refinancing replaces your existing home loan with a new mortgage, ideally at a lower interest rate or with better terms. You apply through a lender, go through underwriting, and if approved, the new loan pays off your old one — leaving you with new monthly payment terms, a new APR, and potentially a different loan length.

What is the difference between a rate-and-term refinance and a cash-out refinance?

A rate-and-term refinance changes your interest rate or loan term without giving you additional cash. A cash-out refinance allows you to borrow more than you owe on your current mortgage, with the difference paid to you in cash. The CFPB recommends understanding both options fully before choosing, as cash-out refinancing increases your total loan balance.

What credit score do I need to refinance my mortgage?

Most conventional refinance products require a minimum FICO Score of 620, though some lenders may accept lower scores for FHA refinance loans. A higher credit score — typically 740 or above — will qualify you for the most competitive interest rates. You can check your credit score for free through services like Experian’s free credit report.

How much does it cost to refinance a mortgage?

Closing costs for a refinance typically range from 2% to 5% of the total loan amount. On a $300,000 loan, that means $6,000 to $15,000 in upfront costs. Some lenders offer no-closing-cost refinances, but these typically roll the costs into a higher interest rate or loan balance.

When does refinancing make financial sense?

Refinancing generally makes sense when you can reduce your interest rate by at least 0.75% to 1%, when you plan to stay in the home long enough to recoup closing costs, and when your DTI and FICO Score support favorable new terms. Calculate your break-even point by dividing total closing costs by your monthly savings.

What is a reverse mortgage refinance and who qualifies?

A reverse mortgage refinance allows homeowners aged 62 or older to convert home equity into cash without making monthly mortgage payments. The loan is repaid when the borrower sells the home, moves out, or passes away. These loans are regulated by HUD under the HECM program and require mandatory counseling from a HUD-approved advisor before closing.

What is a debt-to-income ratio (DTI) and why does it matter for refinancing?

Your DTI is the percentage of your gross monthly income that goes toward debt payments, including your mortgage, credit cards, and loans. The CFPB recommends keeping your DTI below 43% to qualify for most refinance products. Lenders use DTI alongside your FICO Score to assess your ability to repay the new loan.

Can I refinance to consolidate debt?

Yes. A debt consolidation refinance uses your home’s equity to pay off high-interest debts such as credit cards or personal loans, replacing multiple payments with a single, lower-rate mortgage payment. While this can reduce monthly costs significantly, it converts unsecured debt into secured debt — meaning your home is at risk if you fail to make payments.

What is an equity line refinance?

An equity line refinance replaces or supplements your existing mortgage with a home equity line of credit (HELOC), which functions as a revolving credit line tied to your property’s value. As Experian explains, a HELOC allows you to borrow up to a set limit, repay it, and borrow again — making it flexible for ongoing financial needs such as home improvements or education costs.

How does the Federal Reserve’s rate policy affect mortgage refinancing?

The Federal Reserve sets the federal funds rate, which influences short-term borrowing costs and, indirectly, mortgage interest rates. When the Fed raises rates, refinance rates tend to rise, making refinancing less beneficial. When the Fed cuts rates, mortgage refinance activity typically increases as homeowners rush to lock in lower payments. Monitoring Federal Reserve announcements is an important part of timing a refinance decision.

Sources

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