You get money back from refinancing primarily through a cash-out refinance, where you replace your current mortgage with a new, larger one, allowing you to pocket the difference between the loans (minus closing costs). You typically need at least 20% equity and a 620+ credit score to qualify. Funds are usually distributed via wire or check shortly after a three-day cancellation period.
How you receive your funds. Cash-out refinance gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and any prepaid items (for example real estate taxes or homeowners insurance); any remaining funds are paid to you.
Refinancing's impact your home equity depends on the sort of refinance you do. With a rate-and-term refinance, your equity stake shouldn't change, as you're only replacing your current mortgage with a new one. But a cash-out refinance involves borrowing against your ownership stake, which does reduce your equity.
As mentioned, a cash-out refinance replaces your existing mortgage with a new, larger loan. The new loan pays off your old mortgage and provides the additional amount you requested as cash. In the ongoing example, you apply for a new mortgage of $320,000 (the most you can borrow): $100,000 pays off your previous loan.
Refinancing: When you refinance your mortgage with a new lender, any extra money in the escrow account could be refunded to you. In some cases, your old lender will transfer the funds to your new lender's escrow account.
Once your closing attorney receives the money from your new lender, your attorney will record your new mortgage, payoff your old mortgage, and send you a check for any money you were getting back.
Cash-out refinances have a three-day rescission period allowing you an opportunity to change your mind about the new loan. That is why you will not get your cash at the closing table. If you move forward with the loan, you will receive your funds on the fourth day—the disbursement date.
The main "2 rule" for refinancing is getting your interest rate at least 2 percentage points lower, but other key considerations include calculating your break-even point (how long to recoup closing costs) and your reason for refinancing (lower payments vs. shorter term). A significant rate drop (like 2%) usually makes refinancing worthwhile if you stay long enough, but even smaller drops can save you money over time, especially with high loan amounts or long stays.
Refinancing can be good or bad, depending on your situation; it's great for lowering interest rates or payments (saving money) or accessing equity (cash-out), but bad if high closing costs outweigh savings, you reset your loan term to pay more over time, or your credit/financial situation isn't strong enough for better terms. Key factors are lower rates (aim for ~1% drop), staying in the home long enough to recoup closing costs, and your financial goals.
Not checking your credit score before applying
Tip: Check your credit score and full report before starting the process. If you see errors, dispute them and get them corrected. If your score has dropped, consider paying down debt or lowering balances to raise it over the next few months and qualify for better rates.
Remember, refinancing a mortgage may cost about 2% to 3% of the total loan amount. The average closing cost is around $5,000, but it ultimately depends on your loan amount, according to Freddie Mac. If, for instance, your loan is for $400,000, and the cost to refinance is 2% of that amount – you'd be paying $8,000.
The Cons of Refinancing
When you refinance, you are required to pay closing costs like those you paid when you initially purchased your home. The total cost to refinance your mortgage will be determined by your lender, your credit score and your location, but you can expect to spend 3%–6% of your loan principal.
If you're close to paying off your mortgage, refinancing could restart the clock and increase the total interest you pay. Also, if you don't plan to stay in your home much longer, refinancing might not be worth it. It usually takes a few years to break even on the closing costs.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
Dry closings are allowed in the following states, where payment typically takes 2–5 business days: Alaska. Arizona. California.