Key takeaways
- A refinance pays off only if you keep the new loan past the break-even point: closing costs ÷ monthly savings.
- In our example, a 1-point rate drop saves $310 a month and breaks even in about 20 months.
- Restarting a 30-year clock hides a cost. Matching the new term to the years you had left saves far more interest.
- Cash-out refinances turn home equity into debt at today’s rate. Compare them with a HELOC or doing nothing.
Refinancing replaces your mortgage with a new one. You pay closing costs again, typically 2% to 6% of the loan, so the question is always whether the new loan saves more than it costs before you sell or refinance again.
Step 1: Find the break-even point
Say you owe $350,000 at 7.25% with 27 years left, and a lender offers a new 30-year loan at 6.25% with $6,000 in closing costs:
| Current loan | New 30-year loan | |
|---|---|---|
| Rate | 7.25% | 6.25% |
| Principal & interest | $2,464.68 | $2,155.01 |
| Monthly savings | — | $309.67 |
| Closing costs | — | $6,000 |
| Break-even | — | 20 months |
Divide $6,000 by $310 a month and the refinance pays for itself in about 1 year and 8 months. If there’s a real chance you’ll move before then, it’s likely a loss.
Step 2: Watch out for the term reset
The simple break-even misses something. Your current loan has 27 years left. The new one starts a fresh 30-year clock, so you’d make three extra years of payments. Compare the whole rest of each loan:
| New term | Monthly savings | Break-even | Interest saved vs. keeping your loan |
|---|---|---|---|
| 30 years | $310 | 20 months | $22,752 |
| 25 years | $156 | 39 months | $105,903 |
| 20 years | −$94 | No monthly savings | $184,576 |
The 30-year option has the lowest payment but the smallest lifetime savings, because much of the rate cut is spent on three extra years of interest. A 25-year term, close to the 27 years you had left, still lowers the payment and saves several times as much interest. Going shorter than your remaining term raises the payment but saves the most.
If you want the low payment for flexibility, you can take the 30-year loan and prepay the difference. That gets you most of the shorter term’s savings without committing to the higher payment.
Step 3: Check the costs you can negotiate
- Closing costs. Get Loan Estimates from at least three lenders on the same day and compare Section A (origination charges) directly.
- Discount points. Paying points lowers your rate but raises upfront cost, which pushes break-even out. Points only pay off if you keep the loan a long time. See discount points.
- Rolling costs into the loan. It avoids cash at closing, but you pay interest on the costs for the life of the loan.
When refinancing usually makes sense
- You’ll stay well past break-even, and the lifetime interest comparison favors the new loan.
- Dropping mortgage insurance. If your home has gained value, a refinance to 80% loan-to-value or lower can end PMI or FHA MIP. With a conventional loan, first ask your servicer whether it will cancel PMI based on a new appraisal. It’s cheaper than a refinance.
- Moving from an adjustable to a fixed rate before a big reset, if you value payment certainty.
- Shortening your term at a similar payment, like moving from 30 to 20 years when rates fall.
When to think twice
- You’re moving within a few years. You may never reach break-even.
- Cash-out to fund spending. A cash-out refinance turns home equity into 30-year debt. For home improvements it can be reasonable. For vacations or cars, it stretches short-term purchases across decades.
- Consolidating credit card debt. It lowers the rate, but it converts unsecured debt into debt secured by your home. It only works if the card balances don’t come back.
- You’re far into your current loan. Late in a mortgage, most of each payment is principal. Restarting the schedule puts you back at the interest-heavy beginning.
Refinancing a car loan follows the same logic with smaller numbers. See is refinancing an auto loan worth it?