When Should I Refinance My Mortgage?

Refinance when the new loan meets your goal and its benefits justify the costs over the time you expect to keep it. For a lower-payment refinance, closing costs divided by monthly savings estimates when payment savings recover fees; include mortgage-insurance changes and compare remaining loan balances before deciding. This formula does not determine whether shortening the term or taking cash out is worthwhile, because either can raise payments.

Which goals make a refinance worth it?

A refinance pays off your current mortgage with a new one, so every goal below comes with a new set of closing costs. CFPB data put the median total loan costs for a refinance at $7,329 in 2023, not counting taxes, prepaid interest, and escrow deposits.

The initial ARM notice may show estimated rates and payments. Notices with the actual rate and payment for adjustments that change payments, including later adjustments, generally arrive 60 to 120 days before the new payment is due. The trade-offs of an adjustable-rate mortgage explains caps and adjustment periods.

Mortgage insurance is a common reason to refinance FHA loans. For FHA loans with case numbers assigned on or after June 3, 2013 and less than 10% down, the annual premium lasts the life of the loan. With private mortgage insurance (PMI) on a conventional loan, you can usually ask your servicer to cancel it once your balance reaches 80% of the original value, with no refinance needed. Whether refinancing lowers your PMI compares the two routes.

How do you calculate your break-even point?

1. Add up the closing costs on the Loan Estimate, including any points (one point is 1% of the loan amount). Leave out prepaid interest and escrow deposits, since you would pay those on either loan.
2. Subtract the new monthly principal, interest, and mortgage-insurance payment from your current total for those items. Exclude property taxes and homeowners insurance if they are the same under either loan.
3. Divide the costs by the monthly savings to estimate when payment savings recover fees. If savings change as mortgage insurance ends, add them month by month instead.

Worked example. You owe $300,000 at 8.0% with 27 years left, so your principal and interest payment is $2,262.84. A new 30-year loan at 7.0% would cost $1,995.91 a month, a saving of $266.93. With neither loan charging mortgage insurance and $6,000 in closing costs paid upfront, $6,000 / $266.93 = 22.5 months to recover fees through payment savings. Including the higher balance due if you sell moves break-even to month 25.

A lower credit score raises the rate a lender offers, which shrinks the monthly savings and pushes break-even out. How your credit score affects refinancing shows what lenders look at.

Should you refinance if you only plan to stay a few more years?

For a refinance intended to save money, subtract closing costs and any extra loan balance due at sale from your payment savings. A higher balance leaves you with less equity. Using the example above, with figures rounded:

If you might move in two or three years, ask lenders for a no-closing-cost option. The CFPB explains that these loans either charge a higher rate and give you a lender credit to cover costs, or add the costs to your balance. A credit-funded loan has little or nothing to recover, so a smaller rate drop can still save money over a short stay, while the higher rate costs more if you end up keeping the loan for years. The costs and fees of refinancing breaks down which charges you can shop for or reduce.

When does refinancing cost more than it saves?

When it restarts a 30-year term. In the example, the new 30-year loan saves $266.93 a month, but you would make 360 payments instead of 324. Total payments come to $718,527 on the new loan against $733,160 left on the old one, a gap of $14,633 before costs and $8,633 after the $6,000. A 27-year loan at the same 7.0% rate costs $2,063.44 a month, saves $199.39 a month, recovers fees through payment savings in about 30 months, and cuts total payments by $64,604 before costs.

When closing costs are added to the balance. The CFPB notes that financing your costs raises your payment and reduces your equity, and you pay interest on those costs for the life of the loan. Include them in your break-even math even if you pay nothing at closing.

When your current loan has a prepayment penalty. For most mortgages made since January 2014, any penalty allowed under federal rules cannot exceed 2% of the balance paid off in the first two years or 1% in the third year, and none can apply after three years. FHA loans cannot charge one. Check your note or ask your servicer, and add any penalty to your closing costs.

When a cash-out refinance replaces a low rate. A cash-out refinance puts your whole balance at the new rate. If you have a 4% mortgage and need $50,000, moving all of it to 7% can cost far more than borrowing only the $50,000 separately. A HELOC or a home equity loan leaves your first mortgage in place.

For how a refinance replaces your current loan and what happens at closing, see what it means to refinance a mortgage.