How to tell if refinancing is worth it
Refinancing replaces your mortgage with a new one, usually to get a lower rate. It costs money upfront, typically 2% to 5% of the loan, so the key number is how long the monthly savings take to pay back those costs.
Example: $300,000 left at 7.25% with 27 years to go is a $2,112.58 payment. Refinancing to a 30-year loan at 6% drops it to $1,798.65, saving $313.93 a month. $6,000 of closing costs are paid back in 20 months. Over the life of each loan, you'd pay $384,476.57 of interest on the old one versus $347,514.57 plus $6,000 of costs on the new one, saving about $30,962, even with three extra years of payments.
Things to weigh
- How long you'll stay. If you sell before the break-even point, refinancing costs you money.
- Restarting the clock. A new 30-year loan lowers the payment partly by stretching it out. Compare lifetime interest, or keep paying the old amount to finish sooner.
- Rolling costs into the loan avoids paying cash but adds interest on the costs.
- Cash-out refinancing raises the balance and is a different decision; this calculator assumes the balance stays the same.
See the full schedule for the new loan with the amortization calculator.
Frequently asked questions
When is it worth refinancing a mortgage?
Generally when you can lower your rate enough that monthly savings repay the closing costs well before you expect to move. A common rule of thumb is a drop of about 0.75 to 1 percentage point, but the break-even months matter more than the rule.
How much does it cost to refinance?
Usually 2% to 5% of the loan amount for lender fees, appraisal, title and other closing costs. On a $300,000 loan that's $6,000 to $15,000.
Does refinancing hurt your credit?
Slightly and briefly, from the credit check and the new account. Shopping several lenders within a couple of weeks counts as a single inquiry for scoring.
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