Should You Refinance Your Mortgage?

How should you refinance your mortgage? works in practice

A mortgage refinance pays off your existing loan with a new one. Rate-and-term refinances reduce payment or loan length; cash-out refinances borrow against home equity. Closing costs (2–5%) and how long you stay in the home determine if it pays off.

The goal is not to memorize every term — it is to know which inputs matter and what outcome you are aiming for.

So what: When you can explain this in your own words, you are far less likely to accept a bad quote, fee, or assumption.

A real scenario worth running

$320,000 remaining balance, 28 years left at 7.25%, refinance to 5.75% for $4,800 closing costs. Step by step: Current payment ≈ $2,280/month → New payment at 5.75% (30-year) ≈ $1,870/month → saves $410/month → Break-even = $4,800 / $410 ≈ 12 months → If staying 5+ years, total savings exceed $20,000 after break-even. Bottom line: Strong refinance candidate if credit qualifies and you won't move within a year.

So what: Plug your own numbers into the same logic before you decide.

When refinancing makes sense

Refinancing replaces your current mortgage with a new loan — typically to lower your interest rate, change loan term, remove PMI, or access home equity. The decision hinges on rate savings, closing costs, and how long you'll stay.

Break-even months = Closing costs / Monthly payment savings

Refinance when break-even is under 24–36 months and you plan to stay past that point.

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

Rate-and-term vs cash-out

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

Worked example

$320,000 balance, 7.25% rate, 28 years remaining → refinance to 5.75%, $4,800 closing

Staying 5+ years saves $20,000+ after break-even. Restarting a 30-year clock adds total interest — consider 20- or 15-year terms if you can afford higher payment.

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

The 0.75–1% rule of thumb

Many advisors suggest refinancing when you can drop rate by 0.75–1 percentage point. Smaller drops may still work with:

• Large loan balances (savings scale)
• Low closing costs (streamline refi)
• Removing PMI
• Switching from ARM to fixed

Always run your specific numbers — rules of thumb aren't guarantees.

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

Compare: refi vs extra payments

Adding $200/month extra principal on a 6.5% $300K loan saves significant interest without closing costs.

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

Cash-out refinance cautions

Tapping equity for:

You owe more and pay interest on it. If home values drop, you risk being underwater.

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

Credit and equity requirements

Lenders typically want:

• Credit score: 620+ conventional; higher for best rates
• Equity: 20%+ for cash-out; less for rate-and-term
• DTI: Generally under 43–50% back-end
• Appraisal: Home must appraise for loan amount

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

ARM refinance timing

If your adjustable-rate mortgage is about to reset higher, refinancing to a fixed rate locks predictability. Calculate reset payment vs refi payment including costs.

So what: Run your own inputs before you commit — small changes in assumptions can shift the outcome sharply.

Common mistakes

1. Break-even = closing costs / monthly savings — this quietly costs you over time.
2. Don't restart a 30-year clock unless payment relief is the goal — this quietly costs you over time.
3. Cash-out refi increases debt — use for value-adding investments, not consumption..
4. Credit score and home equity affect refi rates and approval — this quietly costs you over time.
5. Compare staying put + extra principal payments vs refinancing — this quietly costs you over time.

What to do next

Use our Mortgage Calculator to model your situation — change one input at a time to see what moves the result most.