Should You Refinance Right Now? A 5-Minute Self-Check
Forget the rate-cut rumors. These are the only three numbers that matter.
Refinancing replaces your current mortgage with a new one. Done at the right time, it can save tens of thousands of dollars. Done at the wrong time, it costs you closing fees and resets your clock to 30 years. Here is the five-minute self-check.
1. The rate gap
Old rule of thumb: refi if you can drop your rate by at least 1%. Updated rule: drop of at least 0.75% is generally worth it if you plan to stay in the home for 3+ more years. Below that, the closing costs eat the savings.
2. The closing costs
Refinance closing costs typically run 2-5% of the loan amount. On a $300,000 mortgage that is $6,000-$15,000. The math you need is "break-even months" - take total closing costs divided by monthly savings.
Example: refi saves you $180/month and costs $5,400 to close. Break-even is 30 months. If you plan to stay at least three years, the refi pays off.
3. The term reset
Most refis go back to 30 years. If you are 7 years into your current 30-year loan and refinance to a new 30-year, you have just added 7 years of payments even if the rate dropped. The honest move is to refinance to a 23-year loan (or whatever is left on your current one) - same payoff date, lower rate, much less interest.
Cash-out refi: a separate beast
A "cash-out" refi lets you borrow against your equity, getting cash at closing. Used to consolidate high-interest debt at a lower rate, it can be a smart move. Used to fund a kitchen remodel or a vacation, it converts unsecured debt-free goals into 30-year secured debt with your house as collateral. Tread carefully.
When NOT to refinance
- You plan to sell within 2 years.
- Your rate is less than 0.5% above current rates.
- Your credit has dropped significantly since you bought.
- You are close to paying off the loan and the closing costs would consume the savings.
Shop three lenders
Mortgage rates and closing costs vary widely. Always get quotes from at least three sources - your current servicer, a mortgage broker, and an online lender. Quotes are free. Two phone calls and an online form can save you thousands.
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