Should You Refinance Your Mortgage? How to Know If It Makes Sense

Mortgage refinancing means replacing your existing loan with a new one — usually to get a lower interest rate, lower monthly payment, or change the loan term. It can save tens of thousands of dollars or cost you money depending on how it's done.

When Does Refinancing Make Sense?

• Rates have dropped 0.75%+ below your current rate
• You plan to stay in the home long enough to recoup closing costs
• You want to switch from an ARM to a fixed rate
• You want to tap home equity (cash-out refinance)
• You want to shorten your loan term

The Break-Even Calculation

Refinancing typically costs 2–5% of the loan amount in closing costs ($4,000–$10,000 on a $200,000 loan). To know if it's worth it: divide closing costs by your monthly savings. If closing costs are $6,000 and you save $200/month, break-even is 30 months. If you'll stay longer than 30 months, refinance.

Rate-and-Term Refinance vs Cash-Out

A rate-and-term refinance simply changes your interest rate or loan term. A cash-out refinance lets you borrow more than you owe and take the difference as cash. Cash-out refinances typically have higher rates and should be used carefully — you're converting equity into debt.

How Much Can You Save?

On a $300,000 loan, dropping from 7.5% to 6.5% saves about $190/month and over $68,000 in total interest over 30 years. The larger your loan and the bigger the rate drop, the more you save.

Steps to Refinance

1. 1Check your credit score (720+ gets the best rates)
2. 2Get quotes from at least 3 lenders
3. 3Lock in your rate
4. 4Submit documentation (income, assets, taxes)
5. 5Closing typically takes 30–45 days