When you refinance your mortgage, you replace your existing home loan with a new mortgage for the same property. The funds from your new mortgage pay off your existing loan, and you start making monthly mortgage payments on the new one instead.

There are many reasons to refinance your mortgage loan. You may do so to reduce your interest rate, lower your monthly mortgage payment, avoid paying mortgage insurance premiums, pay off your loan faster, or borrow from the equity you’ve built in your house.

Here’s when you might want to consider a refinance — and how to make it happen.

Dig deeper: Is now a good time to refinance your mortgage?

First things first: Make sure you're financially ready to refinance.

Check your credit score and see if there are ways to improve your score before refinancing. Your credit score plays a big role in your ability to get approved, and it will influence your interest rate as welly. You should also calculate your debt-to-income ratio (DTI) and consider paying down some debts, as a lower DTI can help you more easily qualify for your loan.

Finally, make sure you have enough money to comfortably cover closing costs. You can typically expect to pay 3% to 6% of the total loan amount in refinancing closing costs.

There are several types of refinances (read more about each below), and your goals for refinancing will determine which one is best for you. Do you want a lower rate or a new term? If so, a simple rate-and-term refinance might be best.

Do you want access to cash? Go for a cash-out refinance. Do you already have a government home loan — such as an FHA loan — and want to refinance into the same type of mortgage? A streamline refinance is probably your best bet. Knowing your goals can help point you in the right direction.

You can refinance with the same lender you used for your first mortgage, but you don't have to. In fact, if you want the lowest rates and fees, you should shop around for mortgage refinance lenders and compare at least a few options.

The best way to do this is to fill out an application with several lenders and use the Loan Estimates each one provides to compare them. These forms detail all the fees and long-term costs of the loan and can help you zero in on the best deal.

Some mortgage lenders give you the option to lock in your mortgage rate so it doesn't change before closing day. If interest rates are trending upward, you may want to lock in your rate so you don't get stuck with a higher rate. If rates are trending downward, you can let your interest rate float in hopes of snagging a better one at closing.

Important note: Some rate locks may come with a fee — especially if you want to lock your rate for a long period of time.

Just like when you bought your home, you'll need to get a home appraisal when you refinance to determine the market value of your home. This helps the lender decide how much it can safely loan you.

Appraisal fees vary by location, but according to Zillow, you can usually expect to pay around $400. You may be able to avoid appraisals if you use a streamline refinance (more on these further down).

Once you have gone through all the steps, you get to close on your new mortgage. This will feel similar to when you closed on your original home loan — but maybe less exciting since you already have the keys to your house. You’ll pay your closing costs and start making payments on your new loan right away.

Refinancing can help you achieve many goals. Here are times it may be a good idea to refinance your mortgage:

If current mortgage rates are lower than the rate on your existing mortgage, you could save money by refinancing to a lower interest rate. Your monthly payment may also be lower. This can help if you’re struggling financially or just want to free up more cash flow each month.

If you’re able to lower your rate and keep making the same payment you’re making now, you might even be able to pay off your loan sooner. The free Yahoo Finance mortgage calculator could help you estimate how much of your monthly payment would be applied to principal and interest with a lower rate.

Learn more: 5 strategies for getting the lowest mortgage rates

Is your credit in better shape than when you bought your house? If it is, then you might be able to lock in a lower interest rate or even qualify for a different type of loan.

For instance, with a higher credit score, you might now be eligible to refinance from an FHA loan to a conventional loan — and if you have enough home equity, eliminate paying mortgage insurance by doing so.

You can also refinance into a different loan term — one that’s shorter, longer, or even just resets your current loan term. This could help you reduce your long-term interest costs or change your monthly payment as needed.

If you were to refinance from a 30-year loan to a 15-year one, for example, you’d have a higher monthly payment, but you’d likely pay less interest over the lifetime of your loan. Refinancing into a longer term would do the opposite, equating to more long-term interest but more affordable monthly payments. It all depends on your personal goals as a homeowner.

Your “equity” refers to your home’s value minus your remaining mortgage balance. If your home has increased in value or you just have a lot of equity at your disposal, refinancing can help you tap into that equity and turn it into cash.

For this, you’d use a cash-out refinance, which involves taking out a new mortgage larger than your current one, paying off your old loan, and receiving the remaining money as a lump sum. You can then use those funds however you like.

Increased home equity can also help you get rid of mortgage insurance if you’re currently paying for it.

This is because conventional mortgages don’t require private mortgage insurance (PMI) once you have at least 20% equity in the home.

So, for example, if you have an FHA loan — which typically requires mortgage insurance for the entire loan term, you could refinance into a conventional one once you hit 20%, removing FHA mortgage insurance from your loan and reducing your monthly payments in the process.

You want to switch between an adjustable-rate and fixed-rate loan

An adjustable interest rate can often give you a lower payment at the start of your loan, but down the line, your rate and payment can increase, causing financial strain and budget issues.

Fortunately, with a refinance, you have the opportunity to change your rate type, choosing a fixed interest rate instead. This protects you from market fluctuations and ensures your rate and payment are consistent for the entire loan term.

One time when you may not want to refinance is when you're planning to sell your home in the next few years. In that case, the benefits of refinancing may not outweigh the costs and the time involved in completing the refinance process.

You should always calculate the break-even point — or the amount of time it takes for the refinance to save you more than it costs — to determine if refinancing is financially beneficial in the long run. (For example, with a refinance that costs $5,000 and saves you $50 per month, you’d break even in 100 months — or about 8.5 years. If you won’t be in the home that long, it may not be worth the effort.)

Getting a new mortgage isn’t right for every homeowner, so before you dive in, it’s important to weigh the pros and cons of refinancing. Here are some crucial factors to consider:

• It could reduce your interest rate.

• You might lower your monthly payment.

• Refinancing can help you pay off your mortgage faster.

• You may be able to free up cash flow.

• You can turn your equity into cash.

• Refinancing comes with closing costs.

• It may not be worth it if you don’t plan to stay in your home long.

• There may be prepayment penalties for paying off your original loan too soon.

• Your credit score will probably take a small hit when you apply for a new loan.

There are several types of mortgage refinances. To decide which kind you should pursue, start by identifying the goal you hope to achieve by refinancing. This table can give you a good idea of which may be best for you. If you want more details, keep reading below to learn about each type of refinancing.

Rate-and-term refinance

A rate-and-term refinance replaces your current mortgage with a new one, only with a new interest rate and term length. It's a good option for a lower interest rate, new term length, or lower monthly payments. You’d also choose this if you want to move from an adjustable-rate loan to a fixed-rate one.

With a cash-out refinance loan, your new loan amount is significantly higher than your current loan's outstanding balance, and the difference is paid to you in cash. You can use the funds to pay off other debts, make home improvements, cover other large expenses, or anything you’d like, really.

Dig deeper:

• FHA cash-out refinance: This is a type of government-backed mortgage loan that lets you tap into your home equity. It requires an appraisal to determine your home’s value, and you’ll also need to pay up-front mortgage insurance again as part of your closing costs. This costs 1.75% of the new loan amount.

• VA cash-out refinance: These cash-out refinances are only available to military members, veterans, and their spouses, and you may be able to access the full value of your property (VA loans allow for 100% financing — no down payments). When you refinance, you will need to pay the VA’s funding fee as part of your closing costs. This ranges from 2.15% to 3.3% of the loan amount, depending on how many times you’ve used the loan program.

A streamline refinance occurs when you replace your current loan with a new loan of the same type, and the paperwork and documentation requirements are simplified. Three types of loans that allow streamline refinancing are FHA loans, VA loans, and USDA loans.

Read more:

• FHA Streamline Refinance: FHA Streamlines allow you to refinance from one FHA loan to a new one. You might do this to lower your rate, get a new term, or change from an adjustable rate to a fixed rate. These often require no appraisal or credit check, and they typically have fewer documentation requirements than a full refinance.

• VA streamline refinance (VA IRRRL): The VA Interest Rate Reduction Refinance Loan, also called an IRRRL, is a type of refinance you’d use if you already had a VA loan and wanted to lower your interest rate or switch from an adjustable to a fixed rate. These require no appraisal or credit check, and they boast a faster closing process than a typical VA refinance. The funding fee on these loans is much lower than most VA loans, costing just 0.5% of the loan amount.

• USDA streamlined refinance: This type of refinance would be a good fit if you have a rural home loan backed by the U.S. Department of Agriculture (USDA) and want to refinance into a new one to achieve lower payments or a better rate. No appraisals are required on these refinances, and you can roll the USDA’s up-front guarantee fee into your new loan amount.

A cash-in refinance is essentially the opposite of a cash-out refinance. Instead of taking out a larger mortgage and receiving cash, you put more money down when you refinance, so you can take out a smaller mortgage. This results in lower monthly payments and less interest paid over the life of the loan.

As the name suggests, a no-closing-cost refinance means you don't have to pay any fees at closing. However, the lender will usually make up that money from you in one of two ways: They'll either roll the closing costs into your mortgage principal or cover the closing costs but charge you a higher interest rate in return. Only do this if you know the costs are worth it.

A short refinance is an option when you're underwater on your mortgage, meaning you owe more on your loan than the house is currently worth.

This type of refinance replaces your current home loan with one for less than what you owe. Your monthly payments will be lower, and you get to stay in your house. Some lenders will agree to a short refinance because, even though it isn't ideal, it can be a better deal for them financially than going through the foreclosure process.

A reverse mortgage isn't technically a type of refinance, but there are some similarities. Like a cash-out refinance, you tap your home equity using a reverse mortgage. Rather than making payments to a lender to pay down your loan, you'll receive money, and your debt will increase.

A reverse mortgage is an option for senior citizens that allows them to have more money in retirement. The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA).

When you refinance, you’ll pay many of the same closing costs you paid when you bought the house. Refinancing typically costs 3% to 6% of your loan balance. For example, if you’re refinancing into a $500,000 mortgage, expect to pay roughly $15,000 to $60,000 in closing costs.

To ensure you get the lowest possible costs, apply for prequalification or preapproval with several lenders — not just your current company. Then, compare rates and fees before deciding which company to refinance with.

So, how long do you have to wait to refinance your current mortgage after buying your house (or since your last refinance)? It depends on the type of loan you have. Here is the waiting period for different types of mortgages and refinances:

• Conforming loan refinance: None

• Jumbo loan refinance: None

• Cash-out refinance (conforming, jumbo, FHA): 12 months

• VA cash-out refinance: 210 days

• FHA or VA Streamline Refinance: 210 days

• USDA loan refinance: 12 months

Even with conforming and jumbo loans that don't have a mandatory waiting period, some mortgage lenders impose a seasoning period — say, six months — before they let you refinance. The best way to get around this rule is to refinance with a different company.

Read more: The best cash-out refinance lenders

You can refinance your home as many times as you want. Just keep two things in mind: First, you must adhere to the aforementioned waiting periods before doing so. Second, you have to pay closing costs each time you refinance, so it can get expensive if you do it multiple times.

According to ICE Mortgage Technology, it typically takes 42 days to refinance a mortgage. To speed up the process, have your documentation — such as tax returns and bank statements — ready for when your lender asks for them. You should also respond to your lender's questions as quickly as possible to avoid delays.

Refinancing and your credit score

You have several options for refinancing with a low credit score.

Some common tactics are pursuing a streamline refinance (which usually doesn't require a hard credit pull), adding a co-signer with a strong credit score, or choosing a mortgage lender that accepts poor credit scores. You can also work on improving your credit score before filling out your application.

Refinancing may hurt your credit score because the mortgage lender will likely do a hard credit pull. However, these hard credit inquiries usually dock your score by less than five points, and although they stay on your credit report for two years, they only affect your score for one year.

Filling out multiple loan applications over a long period of time could also hurt your score, as could closing out your original mortgage account. Fortunately, as you begin paying down your new loan, your score will start to improve.

Refinancing a mortgage means replacing your original one with a new one — one that could have different terms or rates. You then use the funds from your new mortgage to pay off your old one.

Refinancing a mortgage can be a good idea if it will help you financially. For example, if you can get a lower mortgage rate by refinancing, you could save money on your monthly payments and pay less in interest in the long run. But it usually isn't a good idea to refinance if you plan to move soon because the amount you save probably won't make up for the amount you pay up-front in closing costs.

It can be hard to refinance a mortgage if you're in a tough financial spot because you might not get the terms you want. Otherwise, refinancing isn't necessarily harder than getting your original mortgage. Lenders will require a certain credit score, loan-to-value ratio (LTV), and debt-to-income ratio (DTI), though these vary by company and loan program.

First, check your credit score and ensure you’re financially ready to refinance. Then, choose the type of refinance that will help you reach your goals, such as a cash-out or streamline refinance. You should shop around with several lenders to see which will offer you the lowest rates and fees, and decide whether you want to lock in your interest rate or — if rates are decreasing — leave it floating until closing time. Finally, you’ll schedule a home appraisal before finally closing on your new home loan.

That depends on your mortgage lender. In some cases, you may be charged a prepayment penalty if you refinance your loan too quickly after taking it out. Keep in mind that even if your lender doesn’t charge these fees, there are still costs to refinancing. You will typically pay between 3% and 6% of the loan amount in closing costs.

Laura Grace Tarpley edited this article.