What refinancing does
Refinancing replaces your current mortgage with a new one, usually to lower your rate, change your term, or tap equity. It makes the most sense when rates have fallen since you borrowed, your credit has improved enough to qualify for a better rate, or you want to switch from an adjustable to a fixed rate. Because refinancing carries closing costs, the key question is whether you'll keep the new loan long enough for the monthly savings to repay them. Our refinance calculator shows the savings.
Find your break-even point
Refinancing isn't free, closing costs typically run 2% to 5% of the loan. The break-even point, closing costs divided by your monthly savings, tells you how many months it takes to come out ahead. Keep the loan well past break-even and it pays off; sell or refinance again before then and it loses money. Our refinance break-even calculator pinpoints the month you start saving.
Rate-and-term vs. cash-out
A rate-and-term refinance changes your rate or term without raising the balance, the classic way to save on interest. A cash-out refinance borrows more than you owe and gives you the difference in cash, useful for consolidating higher-rate debt or a big expense, but it raises your balance and payment and puts more of your home at risk. Choose based on your goal, and weigh a cash-out carefully against the added debt.
Watch the term reset
A common pitfall is refinancing a loan you're years into back to a fresh 30-year term. The payment drops, but stretching the remaining balance over more years can raise total interest even at a lower rate. To genuinely save, refinance into a term no longer than what you have left, or keep making your old higher payment on the new lower-rate loan. Compare lifetime interest, not just the monthly payment.
Your credit sets the new rate
The rate you can refinance into depends on your current credit score, equity, and debt-to-income ratio, just like the original loan. If your score has risen since you borrowed, you may qualify for a noticeably better rate; if it's fallen, refinancing may not help. Check your credit and get quotes from several lenders before applying, so the new rate is a real improvement worth the closing costs.
Alternatives worth considering
Refinancing isn't always the best tool. If rates haven't fallen, making extra principal payments shortens the loan with no closing costs. If you need cash, a home equity line can tap equity while leaving a low-rate first mortgage untouched. And if you're close to paying the loan off, the closing costs rarely pay off in the time remaining. Weigh these against a refinance before defaulting to one out of habit.
Calculators for this topic
Frequently asked questions
Is it worth refinancing for a 1% lower rate?
Often yes on a large balance, if you'll keep the loan past the break-even point where monthly savings repay the closing costs. Run your numbers to be sure.
How much does refinancing cost?
Closing costs usually run 2% to 5% of the loan. Divide them by your monthly savings to find your break-even point.