Replacing your existing mortgage with a new loan, usually to get a lower interest rate, change the loan term, or cash out some of your home equity. Refinancing involves closing costs similar to your original mortgage, typically 2% to 3% of the loan. A common rule of thumb is that refinancing makes sense if you can lower your rate by at least 0.5% to 0.75% and plan to stay in the home long enough to recoup the costs.
Why It Matters
Refinancing means replacing your current mortgage with a new one — typically to get a lower rate, change your loan term, or cash out equity. A rate-and-term refinance swaps your rate and/or term without borrowing additional money. A cash-out refinance lets you borrow more than you owe and pocket the difference. Refinancing has closing costs (typically 2-4% of the new loan), so the savings must outweigh the costs.
The key metric is the breakeven period: divide closing costs by monthly savings. If refinancing costs $4,000 and saves $150/month, you break even in 27 months. If you plan to stay in the home longer than 27 months, refinancing makes sense. Be cautious about extending your term — going from 25 years remaining to a new 30 years means paying interest for 5 extra years, which can eat into or eliminate your savings.
Real-World Example
Current: $280,000 remaining at 7.0%, 27 years left. Payment: $1,997. Refinance: $280,000 at 6.0%, 30 years. Payment: $1,679. Savings: $318/month. Closing costs: $7,000. Breakeven: 22 months. But new 30-year term means 3 extra years of payments — total savings after accounting for the term extension: ~$42,000 net.
Pro Tip
Use our refinance breakeven calculator to see if refinancing makes sense for your specific numbers. The general rule: it's worth considering if rates have dropped 0.75%+ since your original loan.