Refinance
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When does refinancing make sense?

Refinancing replaces your current mortgage with a new loan — ideally at a lower rate, shorter term, or both. The goal is to reduce your total borrowing cost. But refinancing is not free, so the key question is whether your savings outweigh the upfront costs. Understanding how amortization works helps you see exactly where the savings come from.

Break-even analysis explained

The break-even point is the month when your cumulative monthly savings equal your total refinancing costs (closing costs plus points). Before that month, you are still recouping costs. After it, every dollar saved is pure gain. If you plan to sell or move before the break-even point, refinancing will cost you money. A general rule: if your break-even is under 24 months and you plan to stay in the home for several more years, refinancing is likely worth it.

Rate-and-term vs. cash-out refinance

A rate-and-term refinance changes your interest rate, loan term, or both — without borrowing additional money. This is the most common type and usually offers the lowest rates. A cash-out refinance lets you borrow more than your current balance and take the difference as cash. It is useful for home improvements or consolidating high-interest debt, but increases your loan amount and may come with slightly higher rates. If you only need occasional access to equity, a HELOC may be a better option.

Costs of refinancing

Refinance closing costs typically run 2-5% of the loan amount. Common fees include:

• Origination fee (0.5-1%): The lender's fee for processing the new loan.
• Appraisal ($300-$600): Required to confirm the home's current market value.
• Title search and insurance ($700-$900): Ensures a clear title and protects the lender.
• Discount points (optional): Each point costs 1% of the loan and typically lowers the rate by about 0.25%.
• Recording and government fees: Vary by state and county, typically $100-$300.

Some lenders offer no-closing-cost refinances that roll fees into the rate, meaning you pay more interest over time instead of cash upfront. Comparing lenders on both rate and fees is essential to finding the best deal.

Reasons to refinance a mortgage

Refinancing can help you meet several financial goals. The most common reasons homeowners refinance:

• Lower your interest rate: The most popular reason. Even a 1% rate reduction on a $300,000 loan can save $150+/month and tens of thousands over the loan's life.
• Switch from adjustable to fixed: If you have an adjustable-rate mortgage (ARM) and the rate is about to adjust upward, refinancing to a fixed rate locks in predictable payments.
• Cancel mortgage insurance: If you purchased with less than 20% down, you're paying PMI. Once you reach 20% equity (through appreciation or paydown), refinancing lets you drop PMI entirely.
• Pay off the loan faster: Refinancing from a 30-year to a 15-year term at a lower rate builds equity faster and can save more than half the total interest.
• Cash out equity: A cash-out refinance lets you borrow against your equity for home improvements, debt consolidation, or other major expenses. Learn about HELOCs as an alternative.
• Consolidate debt: Rolling high-interest credit card or personal loan debt into a lower-rate mortgage can reduce your total monthly payments — but be cautious about extending unsecured debt over 30 years.

Choosing the right loan term

Shorter terms mean higher monthly payments but dramatically less total interest. The tradeoff between a 15-year and 30-year mortgage is significant: a 15-year term at a lower rate can save you more than half the total interest of a 30-year term. If you can afford the higher payment, a shorter term builds equity faster and costs far less overall.

How to calculate refinance savings

Compare the monthly payment of your current loan to the proposed new loan. Then use an amortization schedule to compare the principal balance after the same number of payments. Both the monthly payment and principal balance of the new loan should be lower. Refinancing restarts your amortization — you'll pay more interest than principal in the early years — so if you plan to sell soon or have already been paying your mortgage for more than half the term, be sure to run the numbers carefully with this calculator.

Resources.

Everything you need to understand mortgage refinancing.

Frequently Asked Questions.