Refinancing
How to tell in ten minutes whether refinancing is worth it
One division problem decides it. Here is the math, plus the three situations where the obvious answer is wrong.
I talk people out of refinancing more often than I talk them into it. That sounds like bad business and it is the reason our referral rate is what it is.
The core calculation takes about ten minutes and you can do it yourself. Then there are three situations where the simple math gives the wrong answer, and those are worth knowing about too.
The break-even calculation
Take your total closing costs for the new loan. Divide by your monthly savings. The result is the number of months until the refinance pays for itself.
If it costs $4,800 to refinance and your payment drops $210 a month, you break even at month 23. Plan to be in the house longer than that and it is worth doing. Plan to sell in eighteen months and it is not.
That is genuinely the whole thing. Everything else is a refinement of those two inputs.
- Closing costs: title, attorney, appraisal, origination, recording and any prepaid interest. Ask for the total, not the estimate of lender fees alone.
- Monthly savings: new principal and interest versus current principal and interest. Do not include escrow changes, which are your own money.
- Time horizon: be honest rather than optimistic. Most people move sooner than they plan to.
Exception one: you are restarting the clock
A refinance that lowers your payment by stretching 24 remaining years back out to 30 can cost more in total interest even at a meaningfully lower rate.
The fix is to compare against a matching term. If you have 24 years left, price a 25-year or 20-year refinance rather than defaulting to a 30. The payment relief will be smaller and the lifetime savings much larger.
If cash flow is genuinely tight right now, extending the term is a legitimate choice. Just make it knowingly rather than by accident.
Exception two: you are getting rid of mortgage insurance
If you have an FHA loan with the permanent annual premium and your home has appreciated past 20% equity, the break-even math changes completely.
You are not just saving the rate difference, you are eliminating an insurance charge that would otherwise run for the remaining life of the loan. On a $320,000 balance that can be $150 to $190 a month (sample figures) that disappears entirely.
In that scenario, a refinance can make sense even at the same interest rate you already have, which surprises people every time.
Exception three: you need cash, and the first mortgage is cheap
If your existing rate is well below today's market and you need equity, do not refinance the whole balance to get it. Take a home equity line of credit instead and leave the first mortgage where it is.
A cash-out refinance repays your entire loan at today's rate. If you are sitting on a rate from a few years ago, that is an expensive way to access $60,000. A HELOC prices the new money at market and leaves the old money alone.
The reverse is also true. If your current rate is at or above market, a cash-out refinance is usually cheaper than a HELOC for a large sum, because you get a fixed rate on the whole amount.
What to send a lender to get a real answer
You do not need an application to get the math run. Send your most recent mortgage statement, which shows balance, rate and remaining term, plus a rough guess at your home's current value. That is enough for an honest answer in one phone call.
If a lender will not run that calculation without pulling your credit first, that tells you something.
Written for a demo website. Figures, programs and timelines described here are illustrative samples and not financial, tax or legal advice. Talk to a licensed loan officer about your own situation.
