Over the full term this costs $24,543 more than staying put, once closing costs are counted — a lower payment stretched over more years can still cost more in total.
Refinancing FAQ
- How do I know if refinancing is worth it?
- Compare the monthly saving against the closing costs. Divide the costs by the saving and you get the break-even point: the number of months you must keep the loan before the refinance has paid for itself. If you expect to sell or move before that date, refinancing loses you money. The old rule of thumb about needing a two-point drop in rate is obsolete; the break-even date is the number that matters.
- What does it cost to refinance?
- Typically 2 to 5 percent of the loan amount. That covers the lender origination fee, an appraisal, title search and title insurance, recording fees and prepaid escrow items. On a 300,000 dollar loan expect roughly 6,000 to 15,000 dollars. A no-closing-cost refinance does exist, but the lender recovers the money through a higher interest rate, so compare the total payment rather than the headline.
- Why can a lower payment still cost me more?
- Because a refinance usually restarts the clock. If you have 22 years left and refinance into a fresh 30-year loan, the payment falls partly because you spread the balance over eight extra years, and you pay interest for longer. This calculator shows both numbers: the monthly saving and the total interest over the full term, with closing costs included, so you can see when a lower payment is actually a more expensive loan.
- Does refinancing restart my mortgage?
- Yes, unless you choose otherwise. A new loan comes with a new term, so the amortization starts over and the early payments go mostly to interest again. You can avoid that by refinancing into a shorter term that matches the time left on your current loan, which usually keeps most of the interest saving while barely changing your payment.
- How much equity do I need to refinance?
- Lenders generally want at least 20 percent equity for a conventional refinance without mortgage insurance, though many will go to 5 percent with PMI. FHA and VA streamline programs are far more forgiving and often skip the appraisal entirely. If your home has risen in value since you bought it, you may have more equity than you think, and refinancing can remove PMI at the same time.
- Are refinance rates the same as purchase rates?
- Usually close, but slightly higher. Lenders often price refinances a fraction of a point above purchase loans, and cash-out refinances higher still because the risk is greater. The Freddie Mac survey averages published on this site track the purchase market, so treat them as a benchmark and get an actual quote before deciding.
What the break-even point tells you
Refinancing swaps one loan for another, and the trade is simple: you pay closing costs today to lower your payment tomorrow. The question is how long it takes to get that money back.
Divide the closing costs by the monthly saving and you have the answer. Costs of $6,000 against a saving of $418 a month means roughly fifteen months before you are square, and every month after that is genuinely yours. If you might sell or move inside that window, the refinance costs you money no matter how attractive the new rate looks.
That single date is more useful than any rule of thumb. The old advice about needing a two-percentage-point drop dates from an era of much higher balances relative to fees, and it routinely gives the wrong answer today.
The trap of a lower payment
A refinance almost always restarts the clock. Refinance a loan with 22 years left into a fresh 30-year term and the payment falls — but partly because you have spread the same balance over eight extra years, and you will pay interest across all of them.
That is why this calculator reports two separate things:
- the monthly saving, which is what your budget feels; and
- the total interest over the full term, closing costs included, which is what the loan actually costs.
Those two numbers can disagree. A payment that drops by $300 a month can still leave you tens of thousands worse off by the end. When that happens the calculator says so plainly rather than celebrating the lower payment.
The fix is usually to refinance into a term matching the time you have left. Going from 22 years remaining into a 20-year loan captures most of the rate saving without handing the lender eight extra years of interest.
What refinancing costs
Expect 2 to 5 percent of the loan amount: origination fee, appraisal, title search and title insurance, recording fees and prepaid escrow. On a $300,000 balance that is roughly $6,000 to $15,000.
A no-closing-cost refinance is real but misnamed — the lender folds the cost into a higher rate or a larger balance. Compare the total payment and the total interest, not the label.
When it usually makes sense
- Rates have fallen meaningfully since you borrowed, and you plan to stay past the break-even date.
- You want to shorten the term and can afford a higher payment; the interest saving is often dramatic.
- Your home has gained value and refinancing removes PMI, which is a saving on top of the rate.
- You are leaving an adjustable-rate loan before it resets.
And when it usually does not: when you are a few years from paying the loan off, when you expect to move soon, or when the only gain is a lower payment bought with a much longer term.
Check what lenders are quoting in your state before you run the numbers, and use the full mortgage calculator if you want taxes, insurance and PMI in the picture too.