When Does It Actually Make Sense to Refinance?

Refinancing means replacing your current mortgage with a new one. People do it for different reasons, and the right answer depends on your goal and how long you plan to stay. Here is how to think it through.

The four reasons people refinance

• Lower the rate or payment. If rates have dropped since you closed, or your credit has improved, a new loan may carry a lower rate and a smaller monthly payment.
• Shorten the term. Moving from a 30-year to a 15-year loan can save a large amount of interest over time, usually in exchange for a higher monthly payment.
• Switch loan types. If you have an adjustable-rate mortgage and want the certainty of a fixed payment, a refinance can lock it in. Some homeowners also refinance out of FHA to drop mortgage insurance once they have the equity for it.
• Pull out equity. A cash-out refinance replaces your loan with a larger one and gives you the difference in cash, which some people use for renovations or to pay off higher-interest debt.

The number that decides it: your breakeven

A refinance is not free. There are closing costs, often a few thousand dollars. The question that matters is the breakeven point: how many months of savings it takes to cover those costs.

The math is simple. Divide your total closing costs by your monthly savings. If a refinance costs $4,000 and saves you $200 a month, you break even in 20 months. Stay in the home past that point and the refinance pays for itself. Sell or refinance again before then, and it may not have been worth it.

Run your refinance breakeven →

Rate is not the only thing that changed

It is easy to focus only on the interest rate, but a couple of other factors matter just as much:

• How far into your loan you are. If you are ten years into a 30-year mortgage, refinancing back to a fresh 30-year term resets the clock. Your payment may drop while your total interest over the full life of the loan goes up. One fix is to refinance into a shorter term so you are not starting over.
• Your credit and equity today. Both have probably changed since you first bought. More equity and a stronger score can unlock better pricing than you had the first time around.

Cash-out is a different decision

Pulling equity out is not the same as lowering your rate, and it deserves its own thought. You are increasing what you owe on the home in exchange for cash now. That can make sense for a value-adding renovation or to clear high-interest debt, but be deliberate about it. A HELOC is sometimes a better fit when you want to keep a low first-mortgage rate you already have.

Compare a cash-out refinance against a HELOC →

When it is probably not worth it

Refinancing tends to make less sense when you plan to move soon, when your closing costs are high relative to the savings, or when resetting your term would cost you more interest than the lower rate saves. There is no universal rule. It comes down to your numbers and your timeline.

Talk it through

Gene Richter is a mortgage loan originator, not a lender. He can run your breakeven, weigh your current loan against what today's programs offer, and give you a straight read on whether a refinance moves you forward. If it does not, he will say so.

Ask Gene about a refinance.

This article is general information, not a commitment to lend or advice for your specific situation.