Refinancing replaces your existing mortgage with a new one, typically at a lower interest rate. It can save hundreds per month, but it is not free and it resets your amortization clock. The key question is whether monthly savings justify the upfront costs.
The Break-Even Calculation
Break-Even Months = Total Closing Costs / Monthly Payment Savings If refinancing costs $6,000 and saves $200/month, you break even in 30 months. If you plan to stay 5+ years, it is worth it.
When Refinancing Makes Sense
- Rate drop of 0.75%–1%+ from your current rate.
- You will stay in the home past the break-even point.
- Your credit score has improved significantly since the original loan.
- You want to switch from ARM to fixed rate for stability.
- You want to shorten the term from 30 to 15 years.
Hidden Costs to Watch
| Cost | Typical Range | Notes |
|---|---|---|
| Origination fee | 0.5–1% of loan | Negotiable; shop multiple lenders |
| Appraisal | $400–$700 | Required to confirm home value |
| Title insurance | $500–$1,500 | Varies by state |
| Recording fees | $50–$250 | Government filing fees |
Total closing costs typically run 2–5% of the loan. Run the numbers with the Refinance Calculator.
The Amortization Reset Trap
If you are 10 years into a 30-year mortgage and refinance into a new 30-year loan, you restart the amortization clock. Your payment drops, but you may pay more total interest. Consider a 20-year or 15-year term, or make extra payments. Compare with the Amortization Calculator.
Key Takeaways
- Calculate break-even first — divide closing costs by monthly savings.
- Only refinance if you will stay beyond the break-even point.
- A rate drop of 0.75%+ generally makes refinancing worthwhile.
- Watch the amortization reset — consider a shorter term.
- Shop at least 3 lenders and negotiate fees.
Frequently Asked Questions
How much does it cost to refinance a mortgage?
Closing costs typically run 2-5% of the loan amount, or $6,000-$15,000 on a $300,000 loan. Some lenders offer no-closing-cost refinances but build the cost into a higher rate.
Can I refinance with less than 20% equity?
Yes, but you may need to pay PMI. FHA Streamline refinances are available for existing FHA loans with minimal documentation. Conventional loans typically require at least 5% equity.
How many times can you refinance?
There is no legal limit, but some lenders require a 6-12 month waiting period between refinances. Each refinance has closing costs, so the math must justify each transaction.