Refinancing replaces your current mortgage with a new one, ideally at a lower rate or better terms. “You generally need to cut at least a full percentage point from your rate for refinancing to make sense,” says Jeff Ostrowski, Bankrate’s housing market analyst.
However, refinancing isn’t free. Closing costs run 2% to 5% of your loan amount — $6,000 to $15,000 on a $300,000 loan — so your new rate has to be low enough to clear that cost before you come out ahead.
Most borrowers don’t check first. In 2025, 79% of refinance borrowers paid above the most competitive rate available, according to Bankrate’s Hidden Homeownership Tax research, which analyzed 3.2 million mortgage originations. That overpayment cost the typical borrower $3,343 a year — $278 a month — over the life of the loan. Comparing lenders before you refinance is the step most people skip. It’s also the one most likely to save you money.
How does refinancing work?
Refinancing works much like your original mortgage application process: the lender reviews your finances to assess your risk level and determine your eligibility. Knowing what to expect can help the refinance process go smoothly.
Step 1: Set a clear financial goal
Homeowners refinance for a few core reasons: to secure a lower rate, change their loan term or type or tap their home equity. Securing a lower rate is often the most compelling reason to refinance. After all, overpaying on your mortgage costs the typical borrower $3,343 a year, according to Bankrate’s Hidden Homeownership Tax research.
Step 2: Check your credit score and history
Qualifying for a refinance works much like qualifying for your original mortgage — lenders will review your credit score, income, debts and assets. The higher your credit score, the more likely you are to qualify and receive a better rate. For a conventional refinance, a credit score of 620 or higher is generally required for approval, but the most competitive rates are typically reserved for borrowers with scores above 780.
Refinancing a mortgage can temporarily impact your credit, but the hit is usually minimal. When mortgage lenders check your credit to determine whether you qualify for a refinance, that check appears on your credit report. A single inquiry can shave up to five points off your score, though the effect usually fades within a few months. The inquiry itself stays on your credit report for two years, but it stops counting against new applications once that window from your last shopping period closes.
Plus, when you refinance, you’re closing one loan and opening another. That resets part of your credit history — which makes up 15% of your FICO score — so it’s worth timing your refinance when you’re not also opening other credit.
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