Should I refinance my mortgage?
Refinancing replaces your mortgage with a new one, usually at a lower rate. The new lender pays off the old loan and you start paying the new one. The lower rate cuts the interest, but closing costs come first, so the question is how long it takes for the monthly savings to pay them back.
The break-even month
Break-even = closing costs ÷ monthly savings. In the example, a $320,000 balance with 25 years left goes from 7.25% to 6.25%: the payment drops by about $200 a month, so $6,000 of closing costs are paid back in about 30 months. If you sell or refinance again before that, you lose money.
Watch the new term
Restarting at 30 years makes the payment look much lower, but part of that is just paying for longer. For a fair comparison, use the years you have left, or keep your current payment and pay the loan off sooner. The calculator also compares both loans on the date you expect to move, adding the balance you would still owe.
Points and costs
Closing costs usually run 2% to 6% of the loan: origination, appraisal, title, recording and sometimes a prepayment penalty. Discount points (1% of the loan each) buy a lower rate; they pay off only if you keep the loan long enough. Rolling costs into the loan avoids paying cash but raises the balance and the payment.
Other reasons to refinance
People also refinance to switch from an adjustable to a fixed rate, to drop mortgage insurance or to take cash out. This page looks only at the rate and term; compare offers by their APR and the official loan estimate.