Refinance Guide
A simple guide to mortgage refinancing — what it is, how the numbers work, and when it may or may not save you money.
What mortgage refinancing means
Refinancing means replacing your existing mortgage with a new mortgage. The new loan pays off the old one, and you continue making payments under the new terms — typically a new interest rate, monthly payment, and loan length.
Why homeowners refinance
- Lower their interest rate and monthly payment
- Shorten or extend the loan term
- Switch from an adjustable-rate to a fixed-rate loan
- Tap home equity through a cash-out refinance
- Remove private mortgage insurance once equity grows
How closing costs affect savings
Refinancing comes with closing costs — typically 2% to 5% of the new loan amount. These fees are real money out of pocket (or added to your loan). Even when your monthly payment drops, you have to recoup these costs through monthly savings before refinancing actually puts money back in your pocket.
What break-even point means
The break-even point is the number of months it takes for your monthly savings to add up to your total closing costs. If you sell or refinance again before reaching break-even, you generally lose money on the refinance.
Why a lower rate is not always automatically better
Extending your term — for example, replacing a 20-year loan with a new 30-year loan at a slightly lower rate — can reduce your monthly payment but increase the total interest you pay over the life of the loan. Always compare lifetime cost, not just monthly payment.
When refinancing may not make sense
- You plan to move before reaching break-even.
- The rate drop is too small to overcome closing costs.
- Extending the term causes total interest to grow.
- Your credit or income has changed and offers are worse than expected.