A lower rate feels like free money, but refinancing costs thousands upfront. The break-even test — months until the savings repay the costs — is the only maths that matters.
The break-even test
Divide closing costs by the monthly saving. That is how many months until refinancing pays for itself. If you might sell, move or pay off the loan before that month, refinancing loses money — regardless of how good the new rate looks. Run your numbers in the Refinance Break-Even Calculator first.
A worked example
280,000 balance at 7.5% with 25 years left: about 2,069 a month. Refinance to 6% over 30 years: about 1,679 — saving 390 a month. With 6,000 closing costs, break-even is about 15 months. Stay three years and you are roughly 8,000 ahead; sell in a year and you lost money.
The term trap
Restarting to a fresh 30 years lowers the payment but stretches interest over more years — lifetime interest can rise even as the rate falls. The fix: refinance into a shorter term. Going from 7.5% with 25 years left to 6% over 20 years cuts both the payment and the total interest.
What refinancing really costs
Expect 2 to 5% of the loan: lender origination fees, appraisal, title insurance, recording fees and prepaid tax and insurance. Lenders must give you a Loan Estimate within three days of application — compare at least three, because fees vary more than rates.
When it is clearly worth it
Rates down 0.75 to 1% or more, break-even well inside your likely stay, no term stretch you did not choose, and credit solid enough for the best pricing. Bonus cases: dropping PMI once you hit 20% equity, or switching an adjustable rate to fixed before it resets.
When to walk away
Break-even beyond your horizon, planning to move soon, or the "saving" comes only from stretching the term. Also beware cash-out refinances that turn equity into spending money — that is a new loan against your home, not a discount.
Frequently asked questions
How much does it cost to refinance?
Typically 2-5% of the loan amount in closing costs. A Loan Estimate from the lender itemises every fee.
How long does refinancing take?
Usually 30 to 45 days from application to closing, similar to a purchase loan.
Does refinancing hurt credit?
A hard inquiry costs a few points temporarily. Shopping multiple lenders within about two weeks counts as a single inquiry.
Can I refinance with little equity?
Options exist — FHA streamline, VA IRRRL and some conventional programs allow high loan-to-value, but pricing is worse and PMI may apply.