When does refinancing make sense?

A refinance replaces your current mortgage with a new one. It can make sense, but it also has costs, so the question is whether the benefit is bigger than the cost for how long you will keep the loan.

The break-even test

Divide the cost of the refinance by the amount it saves you each month. The result is the number of months until you break even.

Example, not a quote: if a refinance costs $5,000 and lowers your payment by $150 a month, break-even is about 33 months ($5,000 ÷ $150). If you expect to keep the home and the loan for longer than that, the refinance may pay off. If you may sell or refinance again sooner, it may not.

Watch the term

A lower payment is not always cheaper. If you refinance into a new 30-year loan after paying down your current loan for several years, you restart the clock. You may pay less each month and still pay more in total interest over the life of the loan. Compare the total interest as well as the payment, and ask about a shorter term if the payment still fits.

Other good reasons to refinance

• Removing mortgage insurance, if your home has gained value or you have paid down the loan enough to qualify.
• Taking cash out of your equity for home improvements or to consolidate debt. You take on a larger loan balance, so weigh this carefully.
• Shortening the term to build equity faster and pay less total interest.
• Switching from an adjustable-rate loan to a fixed-rate loan for a predictable payment.

What to compare

Look at the Loan Estimate for each offer: the interest rate, the APR, the closing costs and the cash needed at closing. Ask whether closing costs are paid up front or built into the loan, since rolling them in increases the balance.

Check your numbers

The refinance break-even calculator does this math for you. A loan officer can then run the real numbers for your loan and explain whether a refinance fits your goals. There is no obligation, and no credit check for the first conversation.