Should You Refinance?

Refinancing can save you money, but it's not always the right choice. Here's how to determine if it makes sense for your situation.

The Break-Even Point

Calculate how long it takes to recoup refinancing costs:

Break-Even = Closing Costs ÷ Monthly Savings

Example: $4,000 closing costs ÷ $200 monthly savings = 20 months

If you plan to stay in your home longer than 20 months, refinancing makes sense.

Common Reasons to Refinance

  • Lower interest rate: Generally worth it if you can reduce your rate by 0.75-1% or more
  • Shorter loan term: Build equity faster with a 15-year mortgage
  • Switch loan type: Move from ARM to fixed rate for stability
  • Remove PMI: If your equity has increased above 20%
  • Cash-out: Access home equity for improvements or debt consolidation

Refinancing Costs

Expect to pay 2-5% of the loan amount in closing costs:

  • Application fee
  • Appraisal fee
  • Title search and insurance
  • Attorney fees
  • Origination fees
  • Recording fees

Questions to Ask Yourself

  1. How long will I stay in this home?
  2. What are my current rate and monthly payment?
  3. What rate can I qualify for today?
  4. What are the total closing costs?
  5. Will I extend my loan term and pay more interest long-term?

When NOT to Refinance

  • You plan to move in the next 1-2 years
  • Your current rate is already competitive
  • You're late in your loan term (most payments go to principal)
  • Your credit score has dropped significantly
  • You can't afford closing costs without rolling them into the loan