When Refinancing Makes (or Loses) Money
Mortgage refinancing can save tens of thousands of dollars—or cost you money if done at the wrong time. The difference between a good and bad refinance decision often comes down to understanding break-even analysis and total cost of ownership.
The Hidden Cost
This calculator compares your current loan to a potential refinance, calculates your break-even point, and shows whether refinancing makes financial sense for your specific situation and timeline.
The Break-Even Analysis
The break-even point tells you how long it takes for monthly savings to offset refinancing costs. This is the most critical calculation in any refinance decision.
Break-Even Formula
Example: $8,000 closing costs ÷ $200/month savings = 40 months (3.3 years) to break even
Sensitivity Analysis: Rate Drop Impact
The following shows refinancing a $400,000 loan with $8,000 closing costs:
| Rate Drop | Monthly Savings | Break-Even | 10-Year Net Savings |
|---|---|---|---|
| 0.25% | $57 | 140 months (12 yr) | -$1,160 (don't refinance) |
| 0.50% | $118 | 68 months (5.7 yr) | +$6,160 |
| 0.75% | $181 | 44 months (3.7 yr) | +$13,720 |
| 1.00% | $247 | 32 months (2.7 yr) | +$21,640 |
| 1.50% | $383 | 21 months (1.8 yr) | +$37,960 |
Based on $400,000 loan, $8,000 closing costs, 10-year holding period
Notice that a 0.25% drop rarely justifies refinancing—the break-even exceeds most holding periods. But a 1%+ drop creates substantial savings even after accounting for all costs.
The Holding Period Question
Your expected time in the home is critical:
| Planned Stay | Refinance Guidance |
|---|---|
| < 2 years | Rarely refinance—won't reach break-even |
| 2-5 years | Only refinance for 1%+ rate drop or no-cost option |
| 5-10 years | 0.75%+ drop usually worthwhile |
| 10+ years | Even modest improvements (0.5%) can pay off |
Common Refinancing Costs
Closing costs vary by lender, location, and loan size. Per CFPB guidance, typical costs include:
| Cost Type | Typical Range | On $400K Loan |
|---|---|---|
| Origination fee | 0.5-1% of loan | $2,000-4,000 |
| Appraisal | $400-800 | $400-800 |
| Title search & insurance | $500-2,000 | $500-2,000 |
| Recording fees | $50-250 | $50-250 |
| Credit report | $30-50 | $30-50 |
| Prepaid interest | Varies by closing date | $500-2,000 |
| Total | 2-5% of loan | $8,000-20,000 |
Negotiate Everything
Rate and Term vs. Cash-Out Refinancing
Rate and Term Refinance
Simply replaces your current mortgage with better terms—lower rate, shorter term, or both. No cash extracted; you maintain your equity position.
- Best rates and lowest closing costs
- Most common type of refinance
- Can shorten or lengthen term based on goals
- Remove PMI if you've reached 20% equity
Cash-Out Refinance
Take out a larger loan than your current balance and receive the difference as cash. Rates are typically 0.125-0.5% higher than rate-and-term.
Cash-Out Caution
- Home improvements that add value (kitchen, bathroom, additions)
- Consolidating very high-interest debt (20%+ credit cards)
- Education investment with clear career payoff
2025 Conforming Loan Limits
Loans above conforming limits require jumbo financing with stricter requirements and typically higher rates:
| Loan Type | 2025 Limit | Notes |
|---|---|---|
| Standard Conforming | $806,500 | Baseline for most areas |
| High-Cost Area | $1,209,750 | 150% of baseline in designated areas |
| FHA Floor | $524,225 | Minimum FHA limit |
| FHA Ceiling | $1,209,750 | Same as high-cost conforming |
Why Limits Matter
When NOT to Refinance
- Moving within 2-3 years (won't reach break-even)
- Rate drop less than 0.5% on moderate loan balances
- Extending term on a nearly paid-off loan (resets amortization)
- Credit score has dropped significantly since original loan
- Already 15+ years into a 30-year mortgage (most interest already paid)
- Need cash-out for non-investment purposes
- Closing costs unusually high relative to savings
Refinancing Checklist
- Check current rate vs. market rates (is drop significant?)
- Calculate break-even point with realistic closing cost estimates
- Compare expected holding period to break-even
- Get quotes from at least 3-5 lenders
- Request Loan Estimates to compare total costs
- Consider term changes (shorter = more savings but higher payment)
- Lock rate when satisfied (45-60 day lock typical)
- Review Closing Disclosure before signing
Frequently Asked Questions
Q: How much can I save by refinancing?
A: It depends on rate drop, loan size, and remaining term. A 1% rate drop on a $400,000 loan saves approximately $240/month and $86,000+ over 30 years. Calculate your specific break-even to determine if refinancing makes sense.
Q: Is it worth refinancing for 0.5%?
A: On large loans, yes. A 0.5% drop on $400,000 saves ~$120/month. If closing costs are $6,000, break-even is 50 months. If you'll stay 10+ years, you save $8,000+ after break-even. Smaller loans or shorter stays may not justify costs.
Q: Should I refinance to a shorter term?
A: If you can comfortably afford higher payments, shortening your term saves substantial interest and builds equity faster. A 15-year loan typically has 0.5-0.75% lower rates than 30-year. Just don't stretch your budget uncomfortably tight.
Q: Can I refinance with bad credit?
A: Yes, but with worse terms. FHA streamline refinances have lenient requirements for existing FHA loans. Otherwise, expect higher rates and costs. Consider improving credit score first if possible—each 20 points can mean 0.125-0.25% better rates.
Q: How long does refinancing take?
A: Typically 30-45 days from application to closing. Online lenders may be faster (21-30 days). Complex situations or appraisal issues can extend to 60+ days. Rate locks are usually 45-60 days to accommodate the timeline.
Q: Should I pay points to buy down my rate?
A: Calculate the break-even: divide point cost by monthly savings. If break-even is 4 years and you'll keep the home 10+ years, points make sense. Generally, 1 point (1% of loan) lowers rate by ~0.25%. Skip points if you might move or refinance soon.
Q: What is a no-closing-cost refinance?
A: The lender covers closing costs but charges a higher interest rate. This makes sense if you're moving/refinancing again soon. But over 10+ years, paying costs upfront usually saves money. Always compare total cost over your expected stay.
Q: Should I do a cash-out refinance?
A: Only for investments with clear returns: home improvements that add value, paying off very high-interest debt, or education. Never cash out for vacations, cars, or consumption. You're converting equity to debt—a risky wealth transfer.
This calculator provides estimates for educational purposes. Actual rates, costs, and savings depend on creditworthiness, property value, lender policies, and market conditions. Get official Loan Estimates from multiple lenders before making refinancing decisions. This content is not financial advice.