Understanding mortgage refinancing: How it works and what to know

Refinancing replaces your current mortgage with a new one. The new loan pays off the remaining balance on your existing mortgage, and you move forward with a new loan.

The new mortgage loan may change how long the loan lasts, how payments are structured or how the loan is set up overall. While many people explore refinancing to adjust monthly costs, it’s not just a way to cut costs—it’s about reshaping your loan to match your financial and life goals.

Some homeowners choose to explore refinancing with lenders they already trust. Citi, for example, offers mortgage refinancing options across a range of loan types, including conventional refinance loans and government-backed options like FHA and VA refinances, depending on eligibility. These options are designed to support different goals, whether that’s adjusting monthly costs, changing your loan structure or updating a mortgage to better match current plans.

There’s no single “best” refinance. The right option is the one that best fits your situation, and that can look different from one homeowner to the next.

Refinancing comes in a few different forms, each designed to support different needs. Understanding the types can help you assess your options as you explore what’s available.

Rate-and-term refinance

A rate-and-term refinance lets you change your interest rate, your loan length or both, without increasing how much you owe.

Homeowners often look at this option when they want to:

• Lower their monthly payments by changing the interest rate or extending the loan term
• Pay off their home sooner by switching to a shorter loan term

With a rate-and-term refinance, the principal amount you borrowed stays the same— you're just adjusting the interest rate and loan length to better meet your needs.

Cash-out refinance

With a cash-out refinance, you replace your current mortgage with a new one for a higher amount and take the difference as cash.

 A cash-out refinance may help when homeowners want to:

• Pay for home improvements
• Consolidate existing debt
• Cover a large, planned expense

Because you’re borrowing more than you currently owe, lenders look closely at your home equity and overall financial picture to be sure the new loan remains manageable.

Streamline refinances for FHA or VA loans

If you already have an FHA or VA loan, a streamline refinance may offer a simpler path to updating your mortgage.

These refinances are designed to:

• Require less documentation
• Allow you to move through the process more quickly

 Streamline refinances are ideal for eligible borrowers who are seeking a better rate but don’t want to go through a paperwork-heavy process.

While refinancing can feel intimidating at first, most homeowners find that the process follows a clear, steady path.

1. Review your current mortgage and financial goals 

Start by thinking about what you’d like to change. You might be hoping to lower your monthly payment, shorten your loan term, take cash out or simply make sure your mortgage still fits your life today. Having a clear goal may help you focus on the next steps.  

2. Check your credit score and financial position 

Your lender will take a look at your overall financial picture, including your credit score, income and existing debts. This helps determine which refinance options may be available and what feels comfortable for your budget. 

3. Compare refinance options and lenders

Different refinance options support different goals. Looking at a few choices side by side can help you see what aligns best with your plans and which options you can comfortably rule out. 

Some homeowners start by reviewing options with lenders they already know, looking for mortgage refinancing across conventional and government-backed loan types, depending on eligibility. 

4. Submit an application and financial documents 

Once you choose a path, you’ll complete an application and share documents such as pay stubs or bank statements. It’s common for lenders to ask follow-up questions—those requests are simply part of the process. Answering in a timely manner may help keep things moving. 

5. Get a home appraisal 

In most refinancing cases, you’ll need an appraisal to confirm your home’s current value. This step helps ensure the loan is based on accurate information. 

6. Move through underwriting 

Underwriting is a detailed review of all the information you’ve provided. Requests for clarification are normal and don’t usually indicate a problem—they’re just part of making sure the loan is set up correctly. 

7. Review your closing disclosure 

Before closing, you’ll receive a closing disclosure, a document that outlines the final loan terms and costs. This is your opportunity to review everything carefully and ask questions. 

8. Close on your new loan 

At closing, the new mortgage replaces the old one. From there, you move forward with your updated loan structure.

Refinancing looks at many of the same factors as getting a mortgage in the first place. While exact requirements can vary by loan type and lender, these are the areas most homeowners are asked to review: 

•  Credit score: Many lenders look for a credit score around 620 or higher, though this can vary. Generally, stronger credit opens the door to more options or more favorable terms.
• Debt-to-income ratio (DTI): This compares your monthly debt payments to your income. A DTI of 43% or lower is often used as a guideline to help ensure the loan feels manageable alongside your other obligations.
• Home equity: The amount of equity you’ve built in your home matters, especially for certain refinance types. Many options look for around 20% equity, though some loan programs allow for less.
• Stable income and employment: Lenders want to see consistent earnings, which show you can comfortably support ongoing mortgage payments over time.
• Home value confirmation: Usually, you’ll need an appraisal to confirm your home’s current value, ensuring the refinance is based on accurate, up-to-date information.

Meeting these guidelines doesn’t guarantee approval, and falling short of one doesn’t automatically rule you out. Think of them as reference points that help lenders determine which refinance options may be a good fit for your situation. 

Costs to expect when refinancing 

Refinancing comes with upfront costs. Knowing what they are ahead of time can make the process feel more predictable:

• Closing costs: Closing costs are the general fees involved in finalizing a refinance. In most cases, they add up to about 2%–6% of the loan amount. Closing costs cover the behind-the-scenes work needed to set up the new loan, from processing paperwork to required third-party services.
• Appraisal fee: Most refinances include an appraisal to confirm what the home is worth today. This helps make sure the loan is based on an accurate value. Appraisal fees often fall in the $300–$450 range, depending on the property and location.
• Title services: Title fees cover the work of checking that the home’s ownership records are clear and up to date. This step helps prevent surprises down the road and is a routine part of most refinance transactions. Costs vary by state.
• Origination charges: These fees cover the lender’s work to review your application, verify documents and prepare the loan for closing. Origination charges are often around 0.5%–1% of the loan amount, though they can vary.
• Prepaid taxes or insurance: At closing, you may be asked to prepay part of your property taxes or homeowners insurance. This isn’t an added fee—it’s simply collecting amounts that would be due later, often to set up or top off an escrow account. 

Many homeowners find it helpful to compare the upfront costs of refinancing with the potential savings over time. This can help you estimate a break-even point: the point at which the money you save begins to outweigh what you paid to refinance. For example, if refinancing costs $6,000 and lowers your monthly payment by $150, it would take about 40 months for the savings to cover the upfront cost.