Should I refinance?

The rate on the ad is the least useful number in the decision. These five questions settle it for almost any loan.

1. How long will you keep the loan?

This is the question that decides most refinances. Every refinance has a break-even point, the month when savings cover costs. Sell the home, trade in the car or refinance again before then and you lose money. Be honest about job moves and family plans; many people keep a mortgage far shorter than 30 years.

2. What does it cost to switch?

Mortgage refinances carry real closing costs, often 2% to 6% of the loan (Freddie Mac's estimate). Auto and student loan refinances usually cost little or nothing. Get the full figure: on a mortgage, the Loan Estimate lists it on page 2. See what goes into closing costs.

3. Are you resetting the clock?

Refinancing 8 years into a 30-year mortgage with a new 30-year loan means 38 years of payments in total. The payment drops partly because the rate is lower and partly because you're spreading the debt over more years. Choose a term close to what you have left, or keep paying the old amount.

4. How far into the loan are you?

Loans charge most of their interest early. Late in a loan, most of each payment is already principal, so a lower rate saves less, and a new loan brings back the interest-heavy early years. The amortization calculator shows where you are.

5. What do you give up?

Federal student loans lose income-driven repayment and forgiveness options when refinanced privately. Some loans carry prepayment penalties. An adjustable-to-fixed switch might be worth paying for even without savings, for the certainty.

Putting it together

Enter your current loan and the offer in the refinance calculator, set how many years you'll keep it, and read two numbers: the break-even month and your net position at that date. If break-even comes well before you plan to move on and the net position is positive, the refinance is worth pursuing. Then get Loan Estimates from at least three lenders; the CFPB found that borrowers who shop around commonly find meaningfully better rates.

Break-even is where the line crosses zero

Closing costs: $5,000Monthly saving: $180

$5,000 ÷ $180 = 28 months. Keep the loan longer than that and the refinance pays; sell or refinance sooner and it costs you. Double the costs and the crossing moves twice as far out.

The term-reset trap

Years already paid on a $320,000, 7% 30-year mortgage: 7

Payment: $2,129 → $1,749
Debt-free in year: 30 → 37
Still to pay from today: $587,595 → $629,539$41,944 more, despite a lower rate

A lower rate cuts interest per dollar, but a fresh 30-year term adds years of payments. Matching the time you have left (or paying the old amount on the new loan) keeps the full rate benefit.

Questions people ask

When should I refinance my mortgage?

When a new rate (or removing mortgage insurance, or switching from an adjustable to a fixed rate) saves more than the refinance costs within the time you will keep the home. Rate levels alone do not settle it; your balance, time left and costs do.

How does refinancing work?

You apply with a lender, who checks your credit, income and (for mortgages) orders an appraisal. At closing, the new loan pays off the old one in full and you start making payments to the new lender. You pay closing costs either in cash or by adding them to the loan.

Is it worth refinancing for 0.5%?

It can be on a large balance with low costs and many years left. On $400,000, a 0.5-point drop saves roughly $120 to $130 a month; with $4,000 in costs that breaks even in under three years. On a small balance, the same drop rarely covers the costs.

When should I not refinance?

When you expect to sell or refinance again before break-even, when you are near the end of the loan (most interest is already paid), when a prepayment penalty wipes out the saving, or when refinancing federal student loans would cost you protections you may need.