You've probably heard some version of this advice: "Only refinance if you can drop your rate by at least 1%." It's not a rule — it's a rough heuristic that doesn't account for half the variables that actually matter. Whether refinancing makes sense depends on your specific situation: equity, how long you'll stay, closing costs, and what your goals are.
Replace your existing mortgage with a new one at a lower rate, a shorter term, or both. The goal is a lower monthly payment, less total interest paid, or both. Makes sense when you can reduce your interest cost enough to justify closing costs and you'll stay in the home long enough to recoup them.
Refinance for more than you currently owe and receive the difference in cash. Common uses: home renovations, paying off higher-interest debt, funding education, or investing in additional property. Particularly powerful when you're replacing high-interest debt with home equity at a much lower rate.
Total closing costs ÷ Monthly savings = Months to break even
If your refinance costs $6,000 and saves $250/month, that's a 24-month break-even. Stay in the home for at least two years, and it makes financial sense.
If you're listing in the next 12-18 months, closing costs almost never make sense. You'll pay $4,000-$8,000 to save $150-$300/month, then sell before you've broken even.
If you have a rate in the low-to-mid 3% range from 2020-2021, don't touch it. A cash-out refi or renovation isn't worth trading a 3.25% mortgage for something in the 6s or 7s unless the circumstances are extraordinary.
Mortgages are front-loaded — you pay mostly interest in the early years. If you're 10 years into a 30-year loan and refinance into a new 30-year mortgage, you've added 10 years back onto your loan. Your payment might be lower, but total interest paid over the life could be significantly higher. A 15- or 20-year refinance can fix this while still getting you a better rate.
A lender offers their products. A broker shops your loan across multiple lenders and finds you the best available pricing. The difference between a good rate and a great rate on a $500,000 loan can mean hundreds of dollars a month and tens of thousands over the life of the loan.
The rate environment changes, and what doesn't make sense today might make a lot of sense in six months or two years. The goal is to make the decision at the right time for the right reasons.
If you're wondering whether a refinance makes sense for your situation right now, reach out. I'll run real numbers for you — not a generic calculator, not a guess.
