How to Refinance or Remortgage Your Mortgage: US and UK Guide
Mortgage refinancing can reduce your monthly payment, change the structure of your loan, help you access home equity, or allow you to move to a different type of mortgage.
But a lower interest rate does not automatically mean you will save money.
The cost of replacing your existing mortgage matters too.
You may have application fees, valuation or appraisal costs, legal expenses, lender charges, early repayment charges, or other costs. A new mortgage can also restart or extend the repayment period, which may increase the total interest you pay even when the new monthly payment is lower.
The process is also different in the United States and the United Kingdom.
In the US, replacing your existing mortgage with a new mortgage is generally called refinancing.
In the UK, switching to a new mortgage with another lender is generally called remortgaging. Switching to a new deal with your existing lender is commonly called a product transfer.
This guide explains how to compare the numbers, what costs to watch, and how the process works in both countries.
What Does Mortgage Refinancing Mean?
Refinancing means replacing an existing mortgage with a new mortgage.
The new mortgage is used to pay off the old one.
You then make payments according to the terms of the new mortgage.
For example, suppose you currently have:
Mortgage balance: $280,000
Interest rate: 7.00%
Remaining term: 25 years
You might investigate refinancing if another lender offers a lower rate.
But the interest rate is only one part of the comparison.
You also need to consider:
• closing costs
• lender fees
• points
• appraisal costs
• title or settlement costs
• prepayment penalties, if applicable
• the new loan term
• the new monthly payment
• the total interest over the remaining period
In the UK, the same basic financial comparison applies, although the terminology and mortgage structure are different.
Why Do Homeowners Refinance or Remortgage?
There is no single reason to replace a mortgage.
Different homeowners may have completely different goals.
1. Reduce the interest rate
A lower rate can reduce the interest charged on the outstanding balance.
However, the reduction needs to be large enough to justify the costs of switching.
That is why comparing the total cost is more useful than looking at the advertised rate alone.
2. Reduce the monthly payment
A new mortgage with a lower rate or a longer repayment period may reduce the required monthly payment.
But a lower payment does not necessarily mean a lower total cost.
Extending the repayment period can mean paying interest for more years.
3. Shorten the mortgage term
Some homeowners refinance into a shorter loan term.
For example:
30 years → 15 years
A shorter term can mean higher monthly payments, but the loan may be paid off sooner and less interest may be paid over the life of the mortgage.
The correct comparison depends on the borrower's budget and objectives.
4. Change the type of mortgage
A borrower may want to move from one type of mortgage to another.
For example, a US homeowner may compare a fixed-rate mortgage with an adjustable-rate mortgage.
The important features of an adjustable-rate mortgage include the initial rate, the index, the margin, adjustment frequency, and applicable rate caps.
In the UK, borrowers may compare fixed-rate, tracker, discount, and variable-rate products.
5. Access home equity
Some homeowners refinance to borrow against part of the equity in their property.
In the US, this can be done through a cash-out refinance.
The additional borrowing can increase the mortgage balance, so the potential benefit needs to be weighed against the additional interest and repayment obligation.
In the UK, borrowing additional money may involve a further advance or a remortgage that increases the amount borrowed.
6. Remove mortgage insurance where permitted
Some US borrowers may be able to reduce or eliminate mortgage insurance when they have sufficient equity and meet the applicable requirements.
Refinancing is not always necessary for this.
Check whether your existing mortgage allows mortgage insurance to be removed without replacing the loan.
When Might Refinancing Make Financial Sense?
There is no universal interest-rate difference that guarantees refinancing will be worthwhile.
You may see rules suggesting that refinancing becomes worthwhile after a 0.5 or 1 percentage-point rate reduction.
That is only a rough rule of thumb.
The real calculation depends on:
• your remaining mortgage balance
• your current interest rate
• your new interest rate
• your remaining loan term
• refinancing costs
• how long you expect to keep the property
• whether the new mortgage changes the repayment period
A small rate reduction on a large mortgage may produce substantial savings.
A larger rate reduction on a small remaining balance may produce relatively little benefit.
The mathematics matters more than a fixed percentage rule.
Your Credit Profile Matters
Lenders assess borrowers using their own eligibility criteria.
Your credit history, income, debts, property value, loan amount, and other financial information can affect the mortgage products available to you.
If your financial position has improved since you took out your current mortgage, it may be worth comparing new offers.
However, do not assume that a higher credit score automatically guarantees a lower mortgage rate.
The lender evaluates the entire application.
Your Home's Value Can Affect the Calculation
Your property's current value can affect the amount of equity you have.
For example:
Property value: $400,000
Mortgage balance: $280,000
Your approximate equity is:
$400,000 − $280,000 = $120,000
Your loan-to-value ratio is:
$280,000 ÷ $400,000 × 100 = 70%
A lower LTV can sometimes give borrowers access to different mortgage pricing or products.
In the UK, LTV bands are particularly important when comparing mortgage deals. MoneyHelper recommends checking your current LTV because a lower LTV can potentially help you access cheaper mortgage deals.
When Refinancing May Not Be Worthwhile
A lower interest rate is not enough by itself.
There are several situations where changing mortgages may not produce the result you expect.
You plan to move soon
If you expect to sell the property relatively soon, you may not have enough time to recover the costs of refinancing.
Calculate the break-even period before making the switch.
You have a small balance remaining
Suppose you only owe a relatively small amount on your mortgage.
Even a meaningful rate reduction may produce limited savings.
Fees could consume much of the benefit.
You are close to paying off the mortgage
Starting a new long-term mortgage can change the balance between principal and interest.
Do not compare only the new monthly payment.
Compare the total cost over the period you expect to keep the new mortgage.
Your current mortgage has an early repayment charge
An early repayment charge can make switching expensive.
In the UK, early repayment charges can apply when a borrower leaves a mortgage deal before the relevant period ends.
The new mortgage has significant fees
A mortgage with a lower advertised rate may not be cheaper after fees are included.
Always compare the overall cost.
How to Calculate the Refinancing Break-Even Point
One of the simplest calculations is the break-even period.
Use:
Break-even period = Total switching costs ÷ Monthly savings
Suppose your refinancing costs are:
$4,500
Your estimated monthly saving is:
$180
Then:
$4,500 ÷ $180 = 25 months
Your simple break-even point would therefore be about:
25 months
If you expect to keep the new mortgage substantially longer than that, the savings may have time to outweigh the upfront costs.
But this is only a basic calculation.
A more complete comparison should also consider:
• changes in the loan term
• total interest
• points
• taxes and insurance
• prepayment penalties
• lender credits
• changes in the mortgage balance
For example, a “no-closing-cost” refinance does not necessarily mean the costs disappear. A lender may compensate for costs through a higher interest rate or by adding costs to the loan balance. The CFPB specifically warns borrowers to examine how a no-cost refinance is structured.
A Simple US Refinancing Example
Suppose you have:
Current balance: $300,000
Current rate: 7.00%
New rate: 6.25%
Refinancing costs: $5,000
The lower rate may reduce the interest cost, but you should not immediately conclude that refinancing is worthwhile.
First estimate the new payment.
Then compare it with your current payment.
Next calculate the approximate monthly difference.
If the estimated saving is:
$210 per month
then the simple break-even calculation is:
$5,000 ÷ $210 ≈ 24 months
That gives you an initial estimate of about two years.
But you should also compare the remaining term of your current mortgage with the term of the new mortgage.
A new 30-year mortgage could produce a lower monthly payment while extending the period over which you pay interest.
How to Refinance a Mortgage in the US
Step 1: Decide what you want to accomplish
Before contacting lenders, define the purpose of the refinance.
Are you trying to:
• reduce the interest rate?
• reduce the monthly payment?
• shorten the mortgage term?
• change loan type?
• access equity?
• achieve another financial goal?
Your objective determines which offers are worth comparing.
Step 2: Review your current mortgage
Find your:
Outstanding balance
Current interest rate
Remaining term
Monthly principal and interest payment
Prepayment penalty, if any
Also collect information about any escrow, mortgage insurance, or other charges that may affect the comparison.
Step 3: Review your credit and finances
Check your credit reports for errors.
Also review:
• income
• existing debts
• monthly expenses
• savings
• property value
• mortgage balance
A stronger overall financial profile can affect the offers available to you.
Step 4: Compare several lenders
Do not judge a refinance by one advertised interest rate.
Compare:
• interest rate
• annual percentage rate
• lender fees
• points
• credits
• estimated closing costs
• loan term
• monthly payment
• cash required at closing
The CFPB provides mortgage shopping and disclosure resources designed to help borrowers compare loan terms and costs.
Step 5: Prepare your documents
A lender may request information such as:
• proof of income
• tax documents
• bank statements
• identification
• information about existing debts
• homeowners insurance information
• details about the existing mortgage
The exact documentation depends on the lender and borrower.
Step 6: Complete the property valuation process
A lender may require an appraisal or another valuation method to determine the property's current value.
The result can affect the loan-to-value ratio and therefore the terms available to you.
Step 7: Review the Loan Estimate
For many US mortgage applications, the lender provides a Loan Estimate early in the process.
This document helps you understand the proposed loan terms and estimated costs. The CFPB says the Loan Estimate is generally provided within three business days after application.
Use it to compare the offer with other lenders.
Step 8: Decide whether to lock the rate
If you choose a lender, you may be offered a rate lock.
A rate lock can protect the quoted interest rate for a specified period, subject to the terms and conditions of the lock.
Ask:
How long is the rate locked?
Is there a fee?
What happens if closing is delayed?
What happens if the application changes?
Do not assume every rate lock works in exactly the same way.
Step 9: Review the Closing Disclosure
Before closing, review the final figures carefully.
For covered transactions, federal rules require the borrower to receive a Closing Disclosure at least three business days before closing.
Compare it with your earlier Loan Estimate.
Check:
• interest
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