Start with the goal
Refinancing means replacing your current mortgage with a new one. People do it for different reasons, and the right answer depends on which one is yours. Before looking at rates, get clear on what you want the new loan to do.
- Lower the monthly payment by getting a better rate or a longer term.
- Pay off the loan sooner by moving to a shorter term.
- Switch loan types, such as going from an adjustable rate to a fixed rate.
- Remove mortgage insurance once you have built enough equity.
- Take cash out of your equity for a project, debt payoff, or other need.
The break-even question
A refinance has closing costs. The simplest test is how long it takes your savings to cover them.
Here is an example with made-up numbers. If closing costs are $6,000 and the new loan saves you $200 a month, it takes about 30 months to break even. If you expect to stay in the home well beyond that, the refinance may be worth it. If you might sell or move in a year or two, it probably is not.
Those figures are only an illustration. Your own numbers will differ, and I can run them for you.
When a refinance often makes sense
- Rates are meaningfully lower than your current rate, and you plan to stay long enough to pass the break-even point.
- Your credit or finances have improved since you bought, which may qualify you for better terms.
- You have an adjustable rate and want the stability of a fixed payment.
- Your home value has grown and you can remove mortgage insurance.
When it often does not
- You are planning to move soon, so you will not recoup the costs.
- You are far into your current loan. Restarting a new 30-year term can lower your payment but increase the total interest you pay over time.
- Your current rate is already low, and the savings would be small.
- You would be rolling closing costs into the loan for only a minor monthly difference.
Do not forget the full picture
Lowering a payment by stretching the term can feel like a win, but it is worth comparing the total cost of both loans, not only the monthly number. Also keep in mind that a cash-out refinance replaces your whole mortgage, so it affects your rate on the entire balance. Depending on your situation, other options like a HELOC may fit better.
The practical takeaway: write down your goal, estimate your closing costs, and divide by your monthly savings to find the break-even point. If the numbers work and you plan to stay, a refinance is worth a closer look. If you are not sure, send me your current loan details and I will run the comparison with you. There is no obligation.
General information only. Eligibility, terms, and requirements vary by lender and borrower, and not everyone will qualify. This is not a commitment to lend.