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Refinancing Your Mortgage: When It Makes Sense
Summary
Refinancing pays off your old loan with a new one, often at a lower rate. You pay closing costs, so you need to stay in the home long enough for the savings to outweigh the cost.
Refinancing means taking out a new mortgage to replace your current one. People usually do it when rates have dropped so they can get a lower rate and a lower payment, or when they want to shorten the term (e.g. go from 30 years left to 15) to pay off the loan faster.
The catch is that a new loan comes with closing costs. You have to pay those up front, and you only “get it back” over time through lower payments or less interest. So refinancing only makes sense if you plan to stay in the home long enough for the savings to exceed the costs.
Running the numbers
A simple way to think about it: take your closing costs and divide by how much you save each month. That gives you a break-even in months. If you expect to stay in the house longer than that, the refi can pay off. If you might move sooner, you might not recoup the costs. Your Mortgage Affordability Calculator won’t do the refi math, but it can help you see how a lower rate changes your payment.
Definitions
- Refinance
- Replacing your current mortgage with a new loan, often to get a lower rate or change the term.
- Closing costs
- Fees you pay to get a new loan, including appraisal, title, and lender fees. They can add up to thousands of dollars.
FAQ
How do I know if refinancing is worth it?
Compare the monthly savings (or total interest saved) to the closing costs. If you’ll save more than the costs before you expect to move or pay off the loan, it can be worth it. A break-even period of a few years is common.
Does refinancing reset the clock on my mortgage?
It depends. You can refinance into a new 30-year loan (which resets the term) or into a shorter term to pay off faster. You choose the new loan term when you refinance.