Refinancing Basics: When and How to Refinance Your Mortgage

Complete guide to mortgage refinancing: when to refinance, break-even calculations, costs, process, and rate-watch strategies for Seattle homeowners.

Tags:refinance, mortgage, rate-watch, financing, seattle
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You bought your home at 7.0% interest. Rates drop to 6.0%. Should you refinance? How much will you save? What does it cost? Is it worth it?

Refinancing can save you thousands of dollars over the life of your loan. But it's not always the right move. Understanding when to refinance, how the process works, and how to calculate your break-even point helps you make smart decisions about your mortgage.

In this article, you'll learn:

  • What refinancing is and why people do it
  • When refinancing makes sense
  • Types of refinancing (rate-and-term, cash-out, streamline)
  • How to calculate break-even point
  • Refinancing costs and fees
  • How to shop for refinance rates
  • The refinancing process step-by-step
  • Alternatives to refinancing

This article is for you if: You're a homeowner wondering if you should refinance your mortgage.

Table of Contents

What Is Refinancing?

Basic Definition

Refinancing:

  • Replacing your current mortgage with a new one
  • New loan pays off old loan
  • New terms (rate, payment, length)
  • Requires new application, underwriting, closing

Not the same as:

  • Loan modification (changing existing loan terms)
  • Home equity loan (second mortgage)
  • HELOC (line of credit)

Why People Refinance

1. Lower interest rate:

  • Most common reason
  • Reduces monthly payment
  • Saves money over life of loan

Example:

  • Original loan: $720,000 at 6.5% for 30 years
  • Monthly payment: $4,549
  • Refinance to: 5.5% for 30 years
  • New payment: $4,088
  • Savings: $461/month = $5,532/year

2. Shorten loan term:

  • Pay off loan faster
  • Save on interest
  • Build equity faster

Example:

  • Original loan: $720,000 at 6.5% for 30 years (5 years in)
  • Remaining balance: $690,000
  • Refinance to: 5.5% for 15 years
  • New payment: $5,641 (higher)
  • But: Paid off in 15 years instead of 25
  • Interest savings: $300,000+

3. Switch loan type:

  • ARM to fixed (stability)
  • Fixed to ARM (lower rate, if moving soon)
  • FHA to conventional (remove PMI)

4. Cash-out refinance:

  • Borrow more than you owe
  • Take difference in cash
  • Use for: home improvements, debt consolidation, investments

Example:

  • Home value: $900,000
  • Current loan: $600,000
  • Refinance to: $720,000 (80% LTV)
  • Cash out: $120,000
  • Use for: kitchen remodel

5. Remove PMI:

  • If you have FHA loan with PMI
  • Refinance to conventional
  • No PMI if 20%+ equity

6. Add or remove co-borrower:

  • Divorce: Remove ex-spouse
  • Marriage: Add spouse
  • Requires refinance

When Refinancing Makes Sense

Interest Rate Rule of Thumb

Old rule: 2% rate drop

  • Refinance if rate drops 2%+
  • Example: 7% to 5%

New rule: 0.5-1% rate drop

  • Closing costs are lower now
  • Break-even happens faster
  • Even 0.5% can be worth it

Depends on:

  • Closing costs
  • How long you'll stay in home
  • Current loan balance
  • Break-even calculation

Break-Even Analysis

Break-even point:

  • When savings equal closing costs
  • After this, you're ahead

Formula:

  • Break-even (months) = Closing costs ÷ Monthly savings

Example:

  • Closing costs: $5,000
  • Monthly savings: $461
  • Break-even: $5,000 ÷ $461 = 10.8 months

Decision:

  • If you'll stay 11+ months: Refinance
  • If you'll move in 6 months: Don't refinance

Seattle example:

  • Original loan: $720,000 at 6.5%
  • Refinance to: 5.5%
  • Closing costs: $5,000
  • Monthly savings: $461
  • Break-even: 11 months
  • If staying 2+ years: Definitely refinance
  • If staying 1 year: Probably refinance
  • If moving in 6 months: Don't refinance

Other Factors to Consider

1. How long you'll stay:

  • Longer = more savings
  • Shorter = may not break even

2. Current loan balance:

  • Higher balance = more savings
  • Lower balance = less savings

3. How long you've had loan:

  • Early in loan: More interest, more savings
  • Late in loan: Less interest, less savings

4. Your credit score:

  • Better credit = better rate
  • Worse credit = may not qualify

5. Home value:

  • Need 20% equity for best rates
  • Less equity = higher rate or PMI

6. Closing costs:

  • Lower costs = faster break-even
  • Higher costs = slower break-even

7. Your financial goals:

  • Lower payment vs pay off faster
  • Cash out vs build equity

Types of Refinancing

Rate-and-Term Refinance

What it is:

  • Change interest rate and/or loan term
  • No cash out
  • Most common type

When to use:

  • Lower interest rate available
  • Want to shorten or lengthen term
  • Switch loan type (ARM to fixed)

Example:

  • Current: $720,000 at 6.5% for 30 years
  • Refinance: $720,000 at 5.5% for 30 years
  • No cash out
  • Lower payment

Pros:

  • Lower payment (if lower rate)
  • Pay off faster (if shorter term)
  • Predictable (if ARM to fixed)

Cons:

  • Closing costs
  • Restart loan term (if same term)
  • May not break even if moving soon

Cash-Out Refinance

What it is:

  • Borrow more than you owe
  • Take difference in cash
  • Increases loan balance

When to use:

  • Home improvements
  • Debt consolidation
  • Investment
  • Emergency fund

Example:

  • Home value: $900,000
  • Current loan: $600,000
  • Refinance to: $720,000 (80% LTV)
  • Cash out: $120,000
  • Use for: kitchen remodel ($80,000) + emergency fund ($40,000)

Pros:

  • Access equity
  • Lower rate than credit cards or personal loans
  • Tax deductible (if used for home improvements)

Cons:

  • Higher loan balance
  • Higher payment
  • Reduces equity
  • Higher rate than rate-and-term refinance

Requirements:

  • Usually max 80% LTV
  • Good credit (680+)
  • Stable income
  • Appraisal required

Streamline Refinance

What it is:

  • Simplified refinance process
  • Less documentation
  • Faster approval
  • Only for certain loan types

Types:

FHA Streamline:

  • For existing FHA loans
  • No appraisal required
  • No income verification
  • Must lower payment
  • Fast and easy

VA Streamline (IRRRL):

  • For existing VA loans
  • No appraisal required
  • No income verification
  • Must lower payment or switch ARM to fixed
  • Fast and easy

Conventional streamline:

  • Less common
  • Some lenders offer
  • Reduced documentation

When to use:

  • Have FHA or VA loan
  • Want to lower rate
  • Don't want hassle of full refinance

Pros:

  • Fast (2-3 weeks)
  • Easy (minimal documentation)
  • Lower costs
  • No appraisal

Cons:

  • Only for FHA or VA loans
  • Must lower payment (can't cash out)
  • May not get best rate

Short Refinance

What it is:

  • Refinance for less than you owe
  • Lender forgives difference
  • Rare, only if underwater

When to use:

  • Owe more than home is worth
  • Can't afford payments
  • Lender agrees to short refinance
  • Alternative to foreclosure

Example:

  • Home value: $700,000
  • Current loan: $800,000 (underwater)
  • Refinance to: $700,000
  • Lender forgives: $100,000

Pros:

  • Avoid foreclosure
  • Lower payment
  • Stay in home

Cons:

  • Damages credit
  • Lender must agree (rare)
  • May have tax consequences

Seattle note: Rare in Seattle (home values have been rising)

Refinancing Costs

Typical Costs

Total closing costs: 2-5% of loan amount

  • $720,000 loan: $14,400-$36,000
  • Average: $20,000-$25,000

Breakdown:

1. Lender fees ($2,000-$5,000):

  • Origination fee: 0.5-1% of loan ($3,600-$7,200)
  • Underwriting fee: $500-$1,000
  • Processing fee: $300-$700
  • Application fee: $0-$500

2. Third-party fees ($1,500-$3,000):

  • Appraisal: $500-$700
  • Credit report: $30-$50
  • Title search: $200-$400
  • Title insurance: $1,000-$2,000
  • Recording fees: $200-$400

3. Prepaid items ($2,000-$5,000):

  • Prepaid interest: $500-$2,000
  • Property taxes: $1,000-$3,000
  • Homeowners insurance: $1,500-$2,000

4. Escrow account ($1,000-$3,000):

  • Property tax cushion: $500-$1,500
  • Insurance cushion: $500-$1,500

Seattle example:

  • Loan amount: $720,000
  • Lender fees: $4,000
  • Third-party fees: $2,500
  • Prepaid items: $3,500
  • Escrow: $2,000
  • Total: $12,000

No-Closing-Cost Refinance

What it is:

  • Lender pays closing costs
  • In exchange for higher interest rate
  • Or: Closing costs rolled into loan

Example:

  • Standard refinance: 5.5% with $12,000 closing costs
  • No-closing-cost: 5.75% with $0 closing costs

When to use:

  • Don't have cash for closing costs
  • Moving soon (won't break even on costs)
  • Rates may drop again (will refinance again)

Pros:

  • No upfront costs
  • Immediate savings

Cons:

  • Higher interest rate
  • Pay more over life of loan
  • May not be best long-term

Break-even analysis:

  • Standard: 5.5% with $12,000 costs
  • No-cost: 5.75% with $0 costs
  • Payment difference: $100/month
  • Break-even: $12,000 ÷ $100 = 120 months (10 years)
  • If staying 10+ years: Standard is better
  • If moving in 5 years: No-cost is better

Ways to Reduce Costs

1. Shop multiple lenders:

  • Get 3-5 quotes
  • Compare rates and fees
  • Negotiate

2. Negotiate fees:

  • Origination fee
  • Processing fee
  • Application fee
  • Some fees are negotiable

3. Use same lender:

  • May waive some fees
  • Faster process
  • Ask for loyalty discount

4. Use same title company:

  • May reduce title fees
  • Already have title search

5. Skip escrow account:

  • If you have 20%+ equity
  • Pay taxes and insurance yourself
  • Saves escrow cushion

6. Time closing strategically:

  • Close at end of month
  • Reduces prepaid interest

7. Improve credit score:

  • Better rate = more savings
  • Offsets closing costs

How to Shop for Refinance Rates

Where to Get Quotes

1. Current lender:

  • Start here
  • May offer loyalty discount
  • Faster process
  • But: May not be best rate

2. Online lenders:

  • Better.com, Rocket Mortgage, LoanDepot
  • Competitive rates
  • Fast approval
  • Fully online

3. Local banks and credit unions:

  • Relationship banking
  • May offer better rates for members
  • Local service

4. Mortgage brokers:

  • Shop multiple lenders for you
  • May find better rates
  • Charge fee or get commission

5. Online comparison sites:

  • Bankrate, NerdWallet, LendingTree
  • Compare multiple lenders
  • Get multiple quotes quickly

Seattle lenders:

  • Umpqua Bank (local)
  • BECU (credit union, excellent rates)
  • Homestreet Bank (local)
  • National lenders (Rocket, Better, etc.)

What to Compare

1. Interest rate:

  • Lower is better
  • But: Consider APR too

2. APR (Annual Percentage Rate):

  • Includes interest rate + fees
  • Better comparison than rate alone
  • Lower APR = better deal

3. Closing costs:

  • Total costs
  • Breakdown of fees
  • Negotiable fees

4. Loan term:

  • 30 years, 20 years, 15 years
  • Shorter = higher payment, less interest
  • Longer = lower payment, more interest

5. Loan type:

  • Fixed vs ARM
  • Conventional vs FHA/VA
  • Conforming vs jumbo

6. Points:

  • Discount points: Pay upfront to lower rate
  • 1 point = 1% of loan amount
  • Example: 1 point on $720,000 = $7,200
  • Lowers rate by ~0.25%
  • Worth it if staying long-term

7. Lender reputation:

  • Customer reviews
  • Closing time
  • Customer service
  • Reliability

Rate Lock

What it is:

  • Guarantee rate for period of time
  • Protects against rate increases
  • Typically 30-60 days

When to lock:

  • When you're satisfied with rate
  • When you apply
  • Or: Float and lock later

Float vs lock:

  • Float: Rate can go up or down
  • Lock: Rate is guaranteed
  • Float down: Lock with option to lower if rates drop (costs extra)

Seattle example:

  • Apply for refinance at 5.5%
  • Lock rate for 45 days
  • Rates increase to 5.75% during processing
  • You still get 5.5% (locked)

If rates drop:

  • You're stuck at higher rate (unless float down option)
  • May be able to relock at lower rate (ask lender)

The Refinancing Process

Step 1: Decide to Refinance

Calculate break-even:

  • Closing costs ÷ Monthly savings
  • Determine if worth it

Check credit score:

  • Need 620+ (minimum)
  • 740+ for best rates
  • Improve if needed

Check home value:

  • Need 20% equity for best rates
  • Order appraisal or use online estimate

Gather documents:

  • Pay stubs (last 2 months)
  • W-2s (last 2 years)
  • Tax returns (last 2 years)
  • Bank statements (last 2 months)
  • Current mortgage statement

Step 2: Shop Lenders

Get quotes from 3-5 lenders:

  • Compare rates, APR, fees
  • Ask questions
  • Check reviews

Questions to ask:

  • What's the interest rate?
  • What's the APR?
  • What are the closing costs?
  • What fees are negotiable?
  • How long to close?
  • What documents do you need?
  • Do you sell loans? (servicing transfer)

Choose lender:

  • Best combination of rate, fees, service
  • Not always lowest rate

Step 3: Apply

Submit application:

  • Online or in person
  • Provide personal information
  • Authorize credit check

Provide documents:

  • Pay stubs
  • W-2s
  • Tax returns
  • Bank statements
  • Current mortgage statement
  • Homeowners insurance

Pay application fee:

  • $0-$500
  • Some lenders waive

Timeline: 1-2 days

Step 4: Lock Rate

Decide to lock or float:

  • Lock: Guarantee rate
  • Float: Wait for better rate

Lock period:

  • 30 days (standard)
  • 45 days (if need more time)
  • 60 days (if complex)

Timeline: Same day as application

Step 5: Processing

Lender reviews application:

  • Verifies information
  • Orders appraisal
  • Orders title search
  • Prepares loan documents

You may need to provide:

  • Additional documents
  • Explanations (large deposits, etc.)
  • Updated pay stubs

Timeline: 1-2 weeks

Step 6: Appraisal

Appraiser visits home:

  • Measures home
  • Takes photos
  • Compares to recent sales
  • Determines value

Appraisal report:

  • Shows home value
  • Lender uses to determine LTV
  • You receive copy

If appraisal is low:

  • May not qualify for refinance
  • May need to bring cash to closing
  • May need to cancel

Timeline: 1-2 weeks

Step 7: Underwriting

Underwriter reviews:

  • Application
  • Documents
  • Appraisal
  • Credit report
  • Title search

Underwriter may request:

  • Additional documents
  • Explanations
  • Letters of explanation

Underwriter decision:

  • Approved
  • Approved with conditions
  • Denied

Timeline: 1-2 weeks

Step 8: Clear to Close

All conditions met:

  • Underwriter approves
  • Documents prepared
  • Closing scheduled

You receive:

  • Closing Disclosure (3 days before closing)
  • Shows final loan terms and costs
  • Review carefully

Timeline: 3 days before closing

Step 9: Closing

Sign documents:

  • At escrow office or notary
  • Takes 30-60 minutes
  • Similar to purchase closing

Documents you'll sign:

  • Promissory Note
  • Deed of Trust
  • Closing Disclosure
  • Various disclosures

Pay closing costs:

  • Wire transfer or cashier's check
  • Bring to closing

Timeline: Closing day

Step 10: Funding and Recording

Lender funds loan:

  • Sends money to pay off old loan
  • Usually next business day

Deed of Trust recorded:

  • At county recorder
  • Makes new loan official

Old loan paid off:

  • Old lender receives payoff
  • Releases lien
  • Sends payoff letter

Timeline: 1-3 days after closing

Total Timeline

Typical refinance: 30-45 days

  • Application to closing: 30-45 days
  • Streamline refinance: 15-30 days
  • Complex refinance: 45-60 days

Factors affecting timeline:

  • Lender efficiency
  • Appraisal scheduling
  • Document gathering
  • Underwriting complexity

Alternatives to Refinancing

Loan Modification

What it is:

  • Change terms of existing loan
  • No new loan
  • Lender agrees to modify

When to use:

  • Financial hardship
  • Can't afford payments
  • Don't qualify for refinance

Pros:

  • No closing costs
  • No appraisal
  • Faster than refinance

Cons:

  • Lender must agree
  • May damage credit
  • Limited options

Recasting

What it is:

  • Make lump sum payment
  • Lender recalculates payment
  • Same rate, same term
  • Lower payment

When to use:

  • Have lump sum (inheritance, bonus, etc.)
  • Want lower payment
  • Don't want to refinance

Example:

  • Current loan: $720,000 at 6.5%
  • Payment: $4,549
  • Make lump sum payment: $100,000
  • New balance: $620,000
  • New payment: $3,918 (same rate, recalculated)
  • Savings: $631/month

Pros:

  • Low cost ($200-$500 fee)
  • Same rate
  • Lower payment
  • Fast (1-2 weeks)

Cons:

  • Need lump sum
  • Not all lenders offer
  • Doesn't lower rate

Making Extra Payments

What it is:

  • Pay extra toward principal
  • Pay off loan faster
  • Save on interest

When to use:

  • Want to pay off loan faster
  • Don't want to refinance
  • Have extra money

Example:

  • Current loan: $720,000 at 6.5%
  • Payment: $4,549
  • Pay extra: $500/month
  • Payoff: 22 years instead of 30
  • Interest savings: $200,000+

Pros:

  • No cost
  • Flexible (pay extra when you can)
  • Pay off faster
  • Save on interest

Cons:

  • Doesn't lower payment
  • Doesn't lower rate
  • Money is tied up in home

HELOC or Home Equity Loan

What it is:

  • Second mortgage
  • Borrow against equity
  • Keep first mortgage

When to use:

  • Need cash
  • Don't want to refinance first mortgage
  • First mortgage has good rate

Pros:

  • Keep first mortgage rate
  • Access equity
  • Flexible (HELOC)

Cons:

  • Second payment
  • Higher rate than first mortgage
  • Closing costs
  • Reduces equity

Rate-Watch Strategies

Setting Up Rate Monitoring

Why monitor rates:

  • Rates fluctuate daily
  • Missing optimal timing costs money
  • Proactive monitoring = better decisions

What to monitor:

  • 30-year fixed rates (most common)
  • Your loan type (conventional, FHA, VA, jumbo)
  • National average vs your credit tier
  • Trend direction (rising or falling)

How to monitor:

1. Rate alert services:

  • Bankrate: Set target rate, get email alerts
  • NerdWallet: Daily rate updates
  • Freddie Mac: Weekly rate reports
  • Your lender: May offer rate alerts

2. Check frequency:

  • Weekly: If rates are stable
  • Daily: If rates are volatile
  • Monthly: If not planning to refinance soon

3. Track your trigger rate:

  • Calculate your break-even rate
  • Set alert for that rate
  • Act quickly when triggered

Seattle Market Considerations

Seattle-specific factors affecting refinance timing:

1. Home value trends:

  • Seattle home values up 45% (2020-2024)
  • Higher values = more equity = better refinance terms
  • Check your home value annually
  • May qualify for better rates with increased equity

2. Local economic factors:

  • Tech industry cycles affect local rates
  • Amazon, Microsoft hiring = stronger local economy
  • May affect appraisal values

3. Seasonal patterns:

  • Spring/summer: More refinance activity
  • Fall/winter: Sometimes better rates (less demand)
  • Plan timing strategically

4. Property tax increases:

  • Seattle property taxes rising 3-5% annually
  • Affects escrow payments
  • May want to refinance to lower base payment

Decision Framework

Use this framework to decide if now is the right time:

Step 1: Calculate your trigger rate

  • Current rate: ____%
  • Closing costs estimate: $____
  • Monthly savings needed to break even in 2 years: $____
  • Rate needed for that savings: ____%
  • Your trigger rate: ____%

Step 2: Check current rates

  • Current market rate for your credit tier: ____%
  • Is it at or below your trigger rate? Yes / No

Step 3: Evaluate timing

  • How long will you stay in home? ____ years
  • Will you break even? Yes / No
  • Are rates trending up or down? ________
  • Should you wait or act now? ________

Step 4: Check your qualifications

  • Credit score: ____ (need 740+ for best rates)
  • Home equity: ____% (need 20%+ for best rates)
  • DTI ratio: ____% (need under 43%)
  • Do you qualify for best rates? Yes / No

Step 5: Make decision

  • ☐ Refinance now
  • ☐ Wait and monitor (set alert for ____ rate)
  • ☐ Not worth it (explain why: ________)

When to Act Fast vs When to Wait

Act fast if:

  • Rates hit your trigger rate
  • Rates are rising (lock in before increase)
  • You're selling soon (need to break even quickly)
  • ARM is about to adjust
  • Removing PMI will save significantly

Wait and monitor if:

  • Rates are falling (may go lower)
  • You just refinanced (within 6 months)
  • Planning to move soon (won't break even)
  • Credit score improving (wait for better rate)
  • Home value increasing (wait for more equity)

Don't refinance if:

  • Break-even is longer than you'll stay
  • Closing costs too high relative to savings
  • Credit score too low (improve first)
  • Insufficient equity (under 20%)
  • Already have great rate (under 4%)

Historical context:

2020-2021: Refinance boom

  • Rates dropped to 2.5-3.5%
  • Massive refinance wave
  • Many Seattle homeowners locked in low rates

2022-2023: Rate spike

  • Rates rose to 6-7%
  • Refinance activity dropped 80%
  • Focus shifted to home equity loans

2024-2025: Stabilization

  • Rates settling at 6-7%
  • Selective refinancing (ARM to fixed, removing PMI)
  • Cash-out refinancing for home improvements

What this means for you:

  • If you bought 2020-2021: Probably have great rate, don't refinance
  • If you bought 2022-2023: Monitor for rate drops, may refinance soon
  • If you have ARM: Consider refinancing to fixed for stability
  • If you have FHA with PMI: Consider refinancing to conventional

Summary: Key Takeaways

  • Refinancing replaces your current mortgage with a new one (new rate, term, payment)
  • Common reasons: lower rate, shorten term, cash out, remove PMI, switch loan type
  • Rule of thumb: Refinance if rate drops 0.5-1% (old rule was 2%)
  • Calculate break-even: Closing costs ÷ Monthly savings = Months to break even
  • Types: Rate-and-term (most common), cash-out (access equity), streamline (FHA/VA)
  • Closing costs: 2-5% of loan amount ($14,400-$36,000 on $720,000 loan)
  • Shop 3-5 lenders, compare rates, APR, and fees
  • Process takes 30-45 days (application to closing)
  • Rate-watch strategy: Set trigger rate, monitor weekly, act fast when triggered
  • Seattle context: Home values up 45% (2020-2024) = more equity = better refinance options
  • Alternatives: Loan modification, recasting, extra payments, HELOC
  • Refinance if: Staying long enough to break even, rate is significantly lower, financial goals align

Next Steps

  1. Check current rates (Bankrate, NerdWallet, lender websites)
  2. Calculate potential savings:
    • Current payment vs new payment
    • Monthly savings
    • Total interest savings
  3. Estimate closing costs (2-5% of loan amount)
  4. Calculate break-even (Closing costs ÷ Monthly savings)
  5. Decide if worth it (Will you stay past break-even?)
  6. Check credit score (Need 740+ for best rates)
  7. Check home value (Need 20% equity for best rates)
  8. Shop lenders (Get 3-5 quotes)
  9. Apply (if refinancing makes sense)
  10. Monitor rates (Set up rate alerts)

Related articles:

Additional Resources

Rate comparison sites:

  • Bankrate: bankrate.com/mortgages/mortgage-rates
  • NerdWallet: nerdwallet.com/mortgages/mortgage-rates
  • Freddie Mac: freddiemac.com/pmms

Refinance calculators:

  • Bankrate refinance calculator: bankrate.com/calculators/mortgages/refinance-calculator.aspx
  • NerdWallet refinance calculator: nerdwallet.com/mortgages/refinance-calculator

Lenders:

  • Better.com: better.com
  • Rocket Mortgage: rocketmortgage.com
  • BECU (Seattle credit union): becu.org
  • Umpqua Bank (local): umpquabank.com

Rate alerts:

  • Set up alerts on Bankrate or NerdWallet
  • Get notified when rates drop
  • Decide when to refinance
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