Refinance
Does refinancing actually make sense for you?
A refinance is only worth doing when the math works. This page walks through the three decisions that drive that math: what kind of refinance, what it costs, and how long until it pays for itself.
Type 1
Rate-and-term refinance
Replace your existing loan with a new one at a different rate, term, or both — without taking cash out.
When a rate-and-term refi is the move
The clean case: rates have dropped enough below your current rate that the monthly savings, after closing costs, pay for the refinance within a reasonable timeframe. Other common reasons:
- Shorten the term — moving from a 30-year to a 15-year or 20-year to pay off the loan faster, although the required monthly payment may increase.
- Lengthen the term — a longer repayment term may lower the monthly payment, but can increase total interest.
- Refinance out of FHA mortgage insurance — if you qualify for conventional financing. The new loan may still require private mortgage insurance (PMI), depending on its loan-to-value ratio and terms.
- Get out of an ARM — locking a fixed rate before the adjustable period starts.
One useful measure is the simple payment-savings breakeven: how many months of payment savings it takes to recover the refinance transaction costs. That math, and its limitations, are in the section below.
Type 2
Cash-out refinance
Replace your existing loan with a new, larger loan — the cash you receive is the remaining proceeds after mortgage payoffs and transaction costs.
When a cash-out refi is the move
Cash-out refinances are about tapping equity at mortgage rates. Common reasons:
- Funding a major renovation — a kitchen, addition, or full remodel.
- Consolidating higher-interest debt — paying off credit cards or personal loans, when the math is favorable after closing costs.
- Funding a down payment on another property.
- Paying for education or a major life event where you'd otherwise borrow at a higher rate.
If you're consolidating debt, compare total repayment cost, not just the rate or monthly payment. Debt moved into the mortgage becomes secured by your home, putting the home at risk if you cannot make the payments.
Compare keeping your existing first mortgage and adding a HELOC with replacing it through a cash-out refinance. Use the actual rates, payments, fees, loan balances and repayment periods for each option; neither is automatically the better choice.
Cash-out eligibility, equity limits, pricing, and any ownership or loan-seasoning requirements depend on the program and lender.
The math
Simple payment-savings breakeven
How long payment savings take to recover refinance transaction costs — one part of the overall comparison.
How to think about breakeven
For a refinance that lowers your mortgage payment, the simple payment-savings calculation is:
Simple payment-savings breakeven (months) = Refinance transaction costs after lender credits ÷ Monthly mortgage-payment savings
Use transaction costs, including loan and service charges, government charges and applicable prepaid interest, after lender credits. Account separately for tax and insurance prepayments and initial escrow amounts. Monthly savings means the reduction in principal, interest and any mortgage-insurance payments, excluding changes in property taxes and homeowners insurance.
Hypothetical example: $4,500 in refinance transaction costs after lender credits divided by $250/month in mortgage-payment savings equals 18 months. Reaching that point does not by itself establish an overall benefit: compare total interest, the remaining loan balance and how long you expect to keep the loan too.
A few nuances to compare:
- Lender credits — lower upfront costs can come in exchange for a higher rate or another pricing tradeoff. Compare the upfront and ongoing costs; zero upfront cost does not mean free financing.
- Resetting amortization — extending repayment can increase total interest even when the monthly payment falls. Costs financed into the new loan also increase its balance and may add interest.
- Closing-cost categories — separate loan and service charges, government charges, prepaids and initial escrow amounts. Prepaids can include interest, taxes and insurance; they are not all economically irrelevant. Escrow amounts and any refund from the old account affect cash flow and should be considered separately from loan fees.
Ask for help comparing costs, payment savings and the time you expect to keep the loan, alongside the total interest and remaining balance under each option.
Want a real breakeven number for your loan?
Share your refinance goal and current-loan details so we can discuss available options and what information would be needed for an actual quote. Sending the Scenario form is an inquiry, not a quote, Loan Estimate, approval or rate lock.