Refinancing your mortgage can be a great, money-saving option for many homeowners, especially if your credit score has improved and you’re refinancing for a lower interest rate. However, there are also associated costs that must be considered, including fees which can range from 2% to 5% of your balance due.

Could this be a great time to refinance? How soon can you take advantage and possibly get into a lower rate? Even if you can refi, does it make sense for you? Learn how refinancing works, the benefits and drawbacks to refinancing, when the right time to refinance is, and if it’s the right option for you based on your financial goals and what you are looking to accomplish.

How Mortgage Refinancing Works

When you refinance, your current loan gets paid off and replaced with a new one which has different terms. In the transaction, several things about your loan could change including your interest rate, the length of your loan, the loan balance itself and even the type of loan you have.

In a refinance, a payoff check is issued by the lender handling your new loan to the originator of your current loan. When that happens, your relationship with the old lender ends and your new lender takes over from that point forward.

When you’re refinancing, the loans break down into two categories. We’ll get into these in more detail later, but for now here are the basics.