Quick Answer
Refinancing is worth it if monthly savings × months you'll keep the loan ≥ total refi costs. Include appraisal, legal, lender fees, and rate/term changes. Watch "term reset" (e.g., 30 → new 30) which can increase lifetime interest despite a lower rate—consider matching remaining term.
Reasons to refi (rate drop, cash-out, remove PMI, change term)
Rate & Term Refinance
- Lower interest rate (usually 0.5%+ drop worthwhile)
- Switch from ARM to fixed (or vice versa)
- Change loan term (30-year to 15-year)
- Remove PMI after home appreciation
Cash-Out Refinance
- Access home equity for investments
- Consolidate high-interest debt
- Fund major home improvements
- Education or business expenses
True cost of refinancing (line-item breakdown)
| Cost Category | Typical Range | $400k Loan Example |
|---|---|---|
| Origination/Points | 0–1% of loan | $0–$4,000 |
| Appraisal | $300–$600 | $500 |
| Title insurance | $500–$2,000 | $1,200 |
| Legal/Notary | $500–$1,500 | $800 |
| Credit report | $25–$100 | $50 |
| Total Closing Costs | 2–5% of loan | $2,550–$8,550 |
Break-even formula with examples
Basic break-even calculation:
Break-even months = Total closing costs ÷ Monthly savings
Example: Rate Drop Refinance
Current loan: $400,000 at 7.0%, 25 years left = $2,827/month
New loan: $400,000 at 5.5%, 30 years = $2,271/month
Monthly savings: $2,827 - $2,271 = $556
Closing costs: $4,000
Break-even: $4,000 ÷ $556 = 7.2 months
Decision: If staying >8 months, refinance makes sense
Watch Out: Term Reset Trap
Same scenario but considering total interest:
Keep current loan: 25 years × $2,827 = $848,100 total payments
New 30-year loan: 30 years × $2,271 = $817,560 total payments
Better option: Refi to 25-year at 5.5% = $2,467/month, less lifetime interest
Pitfalls: term reset, prepayment penalties, points
Common mistakes to avoid:
- Term reset: Going from 25 years left to new 30-year increases total interest
- Prepayment penalties: Some loans charge 2–6 months interest to pay off early
- Points confusion: Each point = 1% of loan amount, usually lowers rate by 0.25%
- Cash-out limits: Most lenders cap at 80–90% of home value
- Debt consolidation trap: Using home equity to pay credit cards, then running up cards again
US vs. Canada: portability, penalties, blend-and-extend
United States
- Refinancing = new loan, full closing costs
- Usually no prepayment penalties on conventional loans
- 30-year terms common, can refinance anytime
- Rate-and-term vs cash-out have different rules
Canada
- Portability: Transfer mortgage to new home
- Blend-and-extend: Mix current rate with new money
- IRD penalties: Can be very expensive to break early
- Renewal: Different from refinancing, happens every term
Checklist before you apply
Pre-Application Checklist
- ☐ Calculate true break-even (include all costs)
- ☐ Check credit score (740+ gets best rates)
- ☐ Determine current home value (recent sales, online estimates)
- ☐ Review current loan for prepayment penalties
- ☐ Shop 3–5 lenders for quotes within 2-week window
- ☐ Consider term options (don't just default to 30-year)
- ☐ Evaluate cash-out needs vs home equity line of credit
- ☐ Factor in how long you plan to stay in the home
Frequently Asked Questions
How often can I refinance?
No legal limit, but most lenders require 6-month "seasoning" between refis. Consider closing costs and break-even each time.
Is "no-cost" refinancing real?
Costs are built into higher interest rate or loan balance. True if you're not staying long-term, but compare total cost.
When should I buy points?
If you'll keep the loan long enough for lower payment to offset point cost. Each point usually saves 0.25% rate.