Before you refinance your mortgage, calculate the breakeven point — how many months of savings it takes to recoup the closing costs. If you’ll move before hitting breakeven, refinancing costs you money instead of saving it.
7 Things to Know Before Refinancing
| # | Key Point | Details |
|---|---|---|
| 1 | Calculate your breakeven point | Closing costs ÷ monthly savings = months to breakeven |
| 2 | Don’t restart the 30-year clock | Refinancing year 10 into a new 30-year adds 10 years of payments |
| 3 | Closing costs are 2-5% of loan balance | $6,000-$15,000 on $300K mortgage |
| 4 | “No-closing-cost” isn’t free | You pay through a higher rate |
| 5 | Rate isn’t everything — check the term | A lower rate with a longer term can cost more total |
| 6 | You need equity and credit | Most lenders want 20%+ equity and 700+ score |
| 7 | Shop at least 3 lenders in 2 weeks | Multiple inquiries in a short window count as one |
Breakeven Calculator
| Scenario | Current Loan | Refinance Option |
|---|---|---|
| Loan balance | $280,000 | $280,000 |
| Interest rate | 7.25% | 6.25% |
| Monthly payment (P&I) | $1,910 | $1,724 |
| Monthly savings | — | $186 |
| Closing costs | — | $8,400 |
| Breakeven point | — | 45 months (3.75 years) |
If you’ll stay in the home at least 4+ years, this refinance makes sense.
The 30-Year Trap
| Stay on Current Loan | Refinance to New 30-Year | Refinance to 20-Year | |
|---|---|---|---|
| Current loan age | 10 years in | Reset to year 0 | Reset to year 0 |
| Remaining payments | 20 years | 30 years | 20 years |
| Monthly payment | $1,910 | $1,724 | $2,030 |
| Total remaining interest | $178,400 | $340,640 | $207,200 |
| Total cost (remaining) | $458,400 | $620,640 | $487,200 |
The “lower payment” refinance to a new 30-year costs $162,240 more in total. The 20-year refinance saves money without extending the payoff.
When Refinancing Makes Sense
| Situation | Why It Works |
|---|---|
| Rate drops 0.75-1%+ and you’ll stay past breakeven | Clear savings |
| Switch from ARM to fixed rate | Lock in stability before rate adjusts |
| Remove PMI (now have 20%+ equity) | Saves $100-$300/month |
| Shorten term (30 to 15 years) | Pay off faster, save massive interest |
| Cash-out refi for high-ROI improvement | Increase home value strategically |
| Divorce buyout or remove co-borrower | Required for ownership change |
When Refinancing Doesn’t Make Sense
| Situation | Why It Hurts |
|---|---|
| Moving within 3-5 years | Won’t reach breakeven |
| Extending the loan term | More total interest |
| Cash-out for non-appreciating expenses | Vacation, credit card debt = bad collateral swap |
| Small rate difference (under 0.5%) | Savings don’t cover costs |
| Recent credit issues | Won’t qualify for good rate |
| Close to paying off mortgage | Not enough time to benefit |
What You Need to Qualify
| Requirement | Typical Threshold |
|---|---|
| Credit score | 700+ for best rates (620 minimum) |
| Home equity | 20%+ (avoids PMI; 5% minimum) |
| Debt-to-income ratio | Under 43% |
| Employment history | 2+ years stable |
| Appraisal | Home value supports loan amount |
The Bottom Line
Refinancing is a math problem, not an emotional decision. Calculate your breakeven point, avoid restarting the 30-year clock, and get quotes from at least 3 lenders within a 2-week window. The best refinance is one where you lower your rate AND maintain (or shorten) your remaining term.
Related: Before You Refinance | Before You Get a HELOC