The Moment
Interest rates have moved, and you are wondering whether refinancing your mortgage makes sense.
Refinancing is a math problem, not a feeling. The answer depends on three numbers: your current rate, the new rate, and how long you will stay in the home. Everything else — the sales pitch from the loan officer, the "rates are going up!" urgency — is noise.
The Break-Even Test
The formula is simple: Break-even months = Total closing costs ÷ Monthly payment savings
Example: Your closing costs are $6,000 and you save $200/month. Break-even = 30 months (2.5 years). If you plan to stay in the home for 5+ years, the refinance makes sense. If you might move in 2 years, it does not.
Rule of thumb: If the break-even is under 36 months and you plan to stay at least 5 years, refinance. If break-even is over 48 months, the savings are marginal and the hassle may not be worth it.
What counts as closing costs: - Origination fee (0.5-1% of loan) - Appraisal ($300-$600) - Title insurance ($500-$1,500) - Recording fees, credit report, escrow setup - Total: typically 2-3% of the loan amount
Run Your Numbers
Enter your current and potential new mortgage terms to see the break-even analysis.
Mortgage Payoff Planner
When Not to Refinance
You are 15+ years into a 30-year mortgage. At this point, most of your payment is going to principal, not interest. Refinancing resets the amortization clock and you pay more interest in the early years of the new loan.
The rate reduction is less than 0.75%. The closing costs often outweigh the savings at small rate reductions.
You plan to move within 3 years. You will not recoup closing costs.
You are extending the term. Refinancing from a 20-year remaining term to a new 30-year term reduces your monthly payment but increases total interest paid dramatically. Only do this if you are in genuine financial distress.
What to explore next
- →Should I shorten my mortgage to 15 years?
- →Is it worth paying points to get a lower rate?
- →Should I do a cash-out refinance?
Frequently Asked Questions
Should I refinance to a 15-year mortgage?
If you can afford the higher payment, a 15-year mortgage saves enormous interest and builds equity faster. But do not stretch to afford it — the higher payment reduces your financial flexibility. A better approach: take the 30-year rate but make extra principal payments equivalent to a 15-year schedule. You get the flexibility of the lower required payment with the savings of accelerated payoff.
Is a no-closing-cost refinance a good deal?
No-closing-cost refinances roll the costs into a higher interest rate. You pay more over the life of the loan. They only make sense if you plan to move or refinance again within 2-3 years, making the lower upfront cost worthwhile despite the higher rate.