When should I refinance my mortgage?

Refinancing typically makes sense when you can reduce your rate by at least 0.5-1%, plan to stay in the home long enough to recoup closing costs, and have good credit for the best rates.

What are typical refinance closing costs?

Closing costs typically range from 2-5% of the loan amount. On a $250,000 loan, expect $5,000-$12,500 in closing costs.

Should I refinance to a longer term?

A longer term lowers monthly payments but may increase total interest. Consider refinancing to the same or shorter term if you can afford the payments.

What is a break-even point when refinancing?

The break-even point is how long it takes for your monthly savings to cover the closing costs. Divide your total closing costs by your monthly savings. For example, $6,000 in closing costs with $200/month savings means a 30-month (2.5-year) break-even. Refinancing only makes sense if you plan to stay longer than that.

Free Refinance Calculator

Compare your current mortgage with a refinance option. See monthly savings, total savings, and break-even point for refinancing.

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Current Loan Balance

USD

Current Interest Rate

Years Remaining on Current Loan

years

New Interest Rate

New Loan Term

Monthly Savings

$347.48

Current Monthly Payment$1,766.95

New Monthly Payment$1,419.47

Current Total Cost$530,084.40

New Total Cost$511,010.10

Monthly Savings vs Years Remaining on Current Loan

View formula & how it works →

When Refinancing Makes Sense

Refinancing replaces your current mortgage with a new one, usually at a lower rate. The question is whether the interest savings outweigh the closing costs. A typical refi costs $3,000-$6,000 in fees. If the new rate saves you $200/month, you break even in 15-30 months. If you plan to stay in the home longer than that, refinancing pays off.

The Formula

Monthly Savings = Old Payment - New Payment Break-Even Months = Closing Costs / Monthly Savings

The new payment is calculated using the same amortization formula as a mortgage: P * [r(1+r)^n] / [(1+r)^n - 1], but with the remaining balance as principal and the new rate and term.

When to Use This

When rates have dropped at least 0.5-1% below your current rate, or when your credit score has improved significantly since you got the original loan. Also useful when switching from an adjustable-rate mortgage to a fixed rate for predictability.

What Most People Miss

Refinancing restarts your amortization schedule. If you're 10 years into a 30-year mortgage and refinance into a new 30-year mortgage, you just extended your total payoff to 40 years. Even with a lower rate, you might pay more total interest over the life of the loans combined. Consider refinancing into a 20-year term instead to avoid this trap.

The Rate Drop Isn't Everything

Closing costs vary wildly. Some lenders offer "no-cost" refinances but build the fees into a slightly higher rate. Compare the total cost over your expected time in the home, not just the rate. A 5.5% refi with $2,000 in costs beats a 5.25% refi with $8,000 in costs if you're moving in 5 years.

Common Mistakes

Refinancing repeatedly. Each refi has closing costs and resets amortization. Refinancing every time rates drop 0.25% usually loses money.

Cashing out equity to pay off credit card debt, then running the cards back up. You've converted unsecured debt into debt secured by your home.

Not shopping multiple lenders. Rates and fees vary significantly. Get at least 3 quotes on the same day (rates change daily).

Example Calculation

You owe $250,000 at 7% with 25 years remaining. You can refinance at 5.5% for 30 years.

01Current monthly payment: $250,000 at 7% for 25 years = $1,767.63
02New monthly payment: $250,000 at 5.5% for 30 years = $1,419.47
03Monthly savings: $1,767.63 - $1,419.47 = $348.16
04Current total remaining cost: $1,767.63 * 300 = $530,289.00
05New total cost: $1,419.47 * 360 = $511,009.20

Frequently Asked Questions

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