Should You Refinance Your Mortgage? Here's How to Tell

Refinancing replaces an existing mortgage with a new one, usually to get a lower rate, change the loan term, or tap into home equity. It isn't free, though, and running the numbers before applying can save from paying closing costs on a refinance that doesn't actually pay off.

Common reasons people refinance

  • Lowering the interest rate — if market rates have dropped meaningfully since the original loan closed, or if credit has improved enough to qualify for a better rate.
  • Shortening the term — moving from a 30-year to a 15-year loan to pay it off faster and pay less total interest, usually in exchange for a higher monthly payment.
  • Switching loan type — moving off an ARM before it adjusts, or out of an FHA loan to drop mortgage insurance once enough equity has built up.
  • Cash-out refinancing — borrowing more than what's owed and taking the difference in cash, typically for renovations or debt consolidation, secured against home equity.

Refinancing isn't free

A refinance typically comes with its own closing costs — appraisal, origination fees, title work — often in the range of 2% to 5% of the loan amount, similar in kind to costs from the original purchase. Those costs are why refinancing needs a break-even calculation, the same logic used for mortgage points:

Refinance closing costs ÷ Monthly payment savings = Months to break even

If refinancing costs $6,000 and lowers the payment by $150 per month, break-even is 40 months. Staying in the home, or keeping that loan, for less time than that means the refinance likely cost more than it saved.

When the math tends to work

Refinancing tends to make the most sense when there's a meaningful rate drop (not a fraction of a percent), plans to stay in the home well past the break-even point, and enough equity to avoid additional costs like PMI on the new loan. It tends to make less sense soon after the original closing, since a large share of early payments already went toward interest and closing costs on that original loan haven't been recovered yet.

What lenders re-check

A refinance is underwritten similarly to a purchase loan — credit, income, debt-to-income ratio, and a new appraisal are usually required. The Consumer Financial Protection Bureau's refinancing guide covers what to gather beforehand and how to compare Loan Estimates from multiple lenders for a refinance the same way you would for a purchase.

Run your specific numbers

Break-even math looks different depending on your loan balance, current rate, and how long you plan to stay. Use MortgageWise.online's free calculator to plug in your current loan and a potential new rate and see your actual break-even point before applying anywhere.

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