Should You Refinance?

Should You Refinance Your Mortgage? A Complete Guide

Mortgage refinancing replaces your existing home loan with a new one — ideally at a lower interest rate, a shorter term, or both. It's one of the most powerful financial moves a homeowner can make, but it's not free: closing costs typically run 2-5% of the loan amount, meaning you need to stay in the home long enough to recoup that expense through monthly savings. Our refinance calculator quantifies exactly when that break-even point occurs and how much you'll save over the life of the loan.

How Refinancing Works

When you refinance, your new lender pays off your existing mortgage and issues a brand-new loan for the remaining balance (or a different amount, in cash-out refinances). You go through a process similar to your original mortgage application: credit check, appraisal, underwriting, and closing. The key difference is that you're not buying a new home — you're restructuring the debt on one you already own. The new loan comes with its own interest rate, term, and payment schedule, which is why it's so important to compare the old and new numbers side by side.

The Break-Even Point Explained

The break-even point is the single most important number in any refinancing decision. It answers the question: "How many months will it take for my monthly savings to offset the closing costs?" The formula is straightforward: Break-Even Months = Closing Costs ÷ Monthly Savings. If your closing costs are $6,000 and you save $300/month, your break-even is 20 months. Any month beyond that is pure profit. If you plan to sell or move before reaching break-even, refinancing will cost you money instead of saving it.

Rate-and-Term vs. Cash-Out Refinancing

A rate-and-term refinance (what this calculator models) simply changes your interest rate, loan term, or both. The loan amount stays essentially the same. A cash-out refinance lets you borrow more than you owe and pocket the difference — useful for home improvements or debt consolidation, but it increases your loan balance and total interest paid. Rate-and-term refinances typically offer better rates because they carry less risk for the lender.

When Refinancing Makes Sense

Financial experts generally suggest refinancing when you can lower your rate by at least 0.5% to 1%, though the real test is whether you'll stay in the home past the break-even point. Other good reasons include switching from an adjustable-rate mortgage (ARM) to a fixed rate for stability, shortening your term from 30 to 15 years to build equity faster, or eliminating PMI if your home has appreciated enough. Conversely, refinancing rarely makes sense if you're planning to move within 2-3 years, if your current loan has a prepayment penalty, or if the rate drop is minimal relative to the closing costs.

Hidden Costs to Watch For

Closing costs aren't the only factor. Resetting a 30-year clock means you'll pay interest for longer — even at a lower rate, this can actually increase your total interest paid if you've already made years of payments on your current loan. Our calculator accounts for this by comparing the total remaining cost of your current loan against the total cost of the new loan including closing costs. Additionally, watch for appraisal fees, title insurance, origination fees, and prepaid interest that can add thousands to the upfront cost. Always request a Loan Estimate from your lender so you can input the exact closing costs into this calculator.