Should You Refinance Your Mortgage?

The break-even calculation

Refinancing makes sense when your monthly savings exceed the closing costs within the time you plan to stay. The formula is simple: break-even months = closing costs ÷ monthly savings. If you save $293/month and closing costs are $6,000, you break even in about 20 months. Stay longer than that, and refinance is pure savings.

On a $300,000 loan at 7%, the monthly payment is $1,995.91. At 5.5%, it's $1,703.37. The savings: $292.54/month. Over 30 years, that's $105,314 in interest saved — but only if you stay in the home and the loan for the full term.

The break-even tells you the minimum time you need to stay. If you're planning to move in 18 months and the break-even is 20, refinancing costs you money. If you're staying 10 years, it's a clear win.

Closing costs — what you actually pay

Refinancing isn't free. You're taking out a new loan, and that means new closing costs — typically 2–5% of the loan amount. On a $300,000 loan, that's $6,000–15,000. Here's what makes up the costs:

• Loan origination fee — 0.5–1% of the loan. On $300,000: $1,500–3,000.
• Appraisal — $300–600. The lender needs to confirm the home's current value.
• Title insurance and search — $1,000–3,000. Protects the lender (and you) against title defects.
• Recording fees — $100–300. County clerk fees for recording the new mortgage.
• Prepaid items — property tax escrow, interest from closing date to first payment. Can add $2,000–5,000 depending on timing.
• Discount points — optional. Each point costs 1% of the loan and lowers the rate by ~0.25%. On $300,000, one point = $3,000 for a 0.25% rate reduction.

Rate and term refinance — two different goals

A rate-and-term refinance keeps the same loan amount but changes the rate or term (or both). This is the most common type. You refinance to get a lower rate, a shorter term, or both.

Rate refinance: if you're at 7% and rates drop to 5.5%, refinancing a $300,000 loan saves $293/month. The question is whether you'll stay long enough to recover the closing costs.

Term refinance: if you're 10 years into a 30-year loan at 6% and refinance to a new 30-year at 5.5%, your payment drops — but you're now paying for 40 years total. The interest savings from the lower rate may be eaten by the extra 10 years of payments. A refinance to a 15-year term costs more monthly but saves dramatically on total interest.

Cash-out refinance: you borrow more than your current balance and pocket the difference. This increases your loan amount and may raise your payment even at a lower rate. It's a way to tap equity, but it converts home equity into debt — use it carefully.

The amortization reset trap

Here's the hidden cost most people miss: refinancing restarts the amortization clock. If you're 10 years into a 30-year loan, most of your early payments went to interest. You're finally at the point where principal payments are growing. If you refinance to a new 30-year, you're back to the interest-heavy phase.

On a $300,000 loan at 7%/30yr, after 10 years your balance is about $263,922. Your monthly payment is $1,996, and about $1,540 of that goes to interest. If you refinance $263,922 at 5.5%/30yr, your payment drops to $1,498 — but now $1,210 goes to interest and only $288 to principal. You've extended the interest-heavy phase by another 10 years.

To avoid this, refinance to a shorter term. If you have 20 years left on your 30-year loan, refinance to a 20-year (or 15-year) at the lower rate. Your payment may not drop much — but you save tens of thousands in total interest because you're not extending the loan.

When refinancing doesn't make sense

Refinancing doesn't make sense when: you'll move before the break-even, the rate difference is too small (<0.5%), you're near the end of your loan (most interest is already paid), or your home value has dropped (you may not qualify for the loan amount you need).

A common mistake: refinancing for a 0.25% rate reduction. On a $300,000 loan, going from 6.75% to 6.5% saves about $49/month. With $6,000 in closing costs, the break-even is 122 months — over 10 years. Unless you're absolutely certain you'll stay that long, the savings are illusory.

Another trap: refinancing to pull out cash when home values are inflated. If values correct and you owe more than the home is worth, you can't refinance again and may be stuck. Treat home equity like any other asset — don't borrow against it casually.