Rates fell, and your inbox is full of offers. But “should I switch?” is the wrong thing to ask. Ask this instead. “How long until I win back the fees?” That one number tells you all you need.
What refinancing actually does
This swaps your loan for a new one. Often with a new lender, a new rate, a new term, and new fees. Most do it to cut the monthly bill, or to pay less in the end. Some do it to change the term, say from 30 years to 15. And some do it to turn equity into cash.
Critically, refinancing is not free. Closing costsThe fees you pay to set the loan up and transfer the home.Click to open the full glossary. on a refinance typically run 2–5% of the loan amount. You pay them now, or you add them to the new loan. This is the cost you have to win back from what you save each month. Every choice starts here.
The only calculation that matters
Before any other consideration, run the break-evenHow long it takes for savings to cover what a refinance costs.Click to open the full glossary. sum. It tells you how many months it takes to win back the fees from what you save each month.
Example: If refinancing costs $9,000 in closing costs and lowers your monthly payment by $210, your break-even point is 43 months, or about three and a half years. Plan to stay past that? Then a new loan makes financial sense. If you're moving in two years, you'd lock in a loss.
You may have heard you should switch if you can cut your rate by a full point. It is a handy rule. But it skips three things that matter. How long you plan to stay. What you still owe. And what the fees are. The break even sum is the only real test. A half point can be a great move if you are staying for years. A point and a half can still be a bad deal if you sell in a year.
Run the numbers in our free refinance break-even calculator, powered by today's live 30-year national average rate. No signup required.
When refinancing makes sense
- Rates have dropped meaningfully and you plan to stay well past your break even point. Under three years is a strong case.
- Your credit scoreA number lenders use to judge how you handle debt.Click to open the full glossary. has improved since you took out the first loan. A better score can win you a lower rate, even if the market has not moved.
- You want to shorten your loan term. Going from 30 years to 15 cuts what you pay in the end by a lot. Your monthly bill goes up. But the rate on a short loan is often lower too.
- You have an adjustable-rate mortgage (ARM) near the end of its fixed spell. Lock in a fixed rate before it shifts, and your bill stops moving.
- You need to access equity for a big cost, and the rate beats your other ways to borrow.
When it probably doesn't
- You're planning to sell within 2–3 years. Closing costs will almost certainly exceed your accumulated savings.
- You're deep into your loan term. Your first payments go mostly to interest. Say you are 20 years into a 30 year loan. A new 30 year loan sets that clock back to the start. You would pay far more in the end, even at a lower rate. A 15 year loan can still be a good move.
- Closing costs are exceptionally high. In some cases the fees push that past five years. Big loans and rentals both do this. So run the numbers.
- You're close to paying off PMI on your existing loan. A new loan sets your equity clock back. That can bring PMI back too.
"Refinancing into a new 30-year loan when you're already 20 years in often costs more in total interest, even at a lower rate."
Rate-and-term vs. cash-out
Rate-and-term refinance
This is the most common kind. You swap your loan for a new one at a lower rate, a new term, or both. What you owe stays about the same. Any fees you roll in get added. This is just about cutting what it costs to borrow.
Cash-out refinance
You borrow more than your current balance and receive the difference as cash. For example, if you owe $280,000 and your home is worth $450,000, you might refinance into a $330,000 loan and take $50,000 in cash. The rate on a cash-out refinance is typically 0.25–0.5% higher than a comparable rate-and-term loan, reflecting the additional risk. Most lenders require you to retain at least 20% equity after the cash-out.
What you'll need to qualify
Qualifying for a refinance is similar to getting the original mortgage:
- Credit score. Most lenders want a score of 620 or more. A score of 740 gets you the best rates. Check yours first, so there is no shock.
- Equity. Most lenders want you to own 20% of the home. That keeps PMI off the new loan. If you want cash out, they want more than that.
- Debt-to-income ratio (DTI). Most lenders cap DTI at 43–50%. If your income has changed since you bought, this bears watching.
- Employment and income verification. You will need two years of tax forms, recent pay slips, and bank bills. It is much the same as when you bought.
Once you apply and get a quote, you can lock your rate for a month or two. That holds while they work on the loan. Do not wait and hope for a better rate. If it moves the wrong way before you close, your savings are gone. Lock when the break-even math works for you.
These chances open and close fast. By the time you find your bill, weigh up rates, and do the math, the moment can pass. We recalculate your break-even point as rates move. Then we email you when a rate change is worth acting on for your loan.
Know when your refinance window opens
We track your break-even point as rates move. Then we email you when the numbers work.
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