Guide · Mortgages & Property
Should You Refinance? How to Calculate Whether It's Worth It
Refinancing replaces your existing mortgage with a new one, ideally at a lower rate. But closing costs mean there is always a break-even period — and if you move or sell before reaching it, you lose money. Here is how to do the maths.
The break-even formula: the only calculation that matters
Refinancing costs money upfront — typically 2–5% of the loan amount in closing costs. The monthly savings from the lower rate gradually pay those costs back. The break-even point is simply: closing costs divided by monthly savings. If you plan to stay in the home longer than that, refinancing saves you money. If you might move sooner, it costs you money.
You may have heard that a 1% rate drop is the rule of thumb for refinancing. That heuristic is too simple — it ignores loan size, remaining term, and how long you plan to stay. The break-even calculation is far more reliable and takes only a few minutes.
Worked example: $350,000 mortgage from 7% to 5.5%
| Current mortgage (7%) | Refinanced (5.5%) | Difference | |
|---|---|---|---|
| Monthly payment (30yr) | $2,329 | $1,987 | −$342/month |
| Closing costs | — | $8,000 | |
| Break-even point | — | 23 months | |
| Total interest (30yr) | $488,440 | $365,320 | −$123,120 |
At $342 per month in savings and $8,000 in upfront costs, you recover the costs in 23 months. Stay longer than that and every subsequent month puts $342 back in your pocket.
Rate-and-term vs cash-out refinance
A rate-and-term refinance simply changes the interest rate, the loan term, or both — the new loan pays off the old loan and nothing more. This is the classic refinance used to lower monthly payments or reduce the total interest paid.
A cash-out refinance replaces your mortgage with a larger loan and delivers the difference in cash. It is useful for home improvements or consolidating high-interest debt, but it increases your loan balance and typically carries a slightly higher rate (0.25–0.75%) than a rate-and-term refinance. Lenders typically cap cash-out at 80% of the home's appraised value.
The hidden risk: resetting the amortisation clock
Mortgage amortisation front-loads interest payments. In the early years of a 30-year mortgage, the majority of each payment is interest; only in the later years does the principal repayment dominate. If you are 10 years into a 30-year mortgage and you refinance into a new 30-year loan, you restart that clock.
This means that even if your rate drops, you could pay more total interest over the life of both loans combined. The solution is to either refinance into a shorter-term loan (say, 20 years) or to make extra principal payments on the new loan to match your original payoff timeline. The monthly payment may still be lower even on a shorter term if the rate reduction is substantial enough.
Frequently asked questions
What are typical closing costs for a refinance?
Refinance closing costs in the US typically run between 2% and 5% of the loan amount. On a $350,000 loan, that is $7,000 to $17,500. Common line items include origination fees, appraisal ($400–$700), title search and insurance ($1,000–$2,000), recording fees, and prepaid interest. Some lenders offer no-closing-cost refinances, where the costs are rolled into the loan balance or covered by a slightly higher rate — useful if you plan to move within a few years.
Does refinancing hurt my credit score?
Refinancing causes a small, temporary dip in your credit score — typically 5 to 10 points — due to the hard credit inquiry and the new account being opened. This effect fades within 6 to 12 months. If you are rate-shopping with multiple lenders, doing so within a 14 to 45-day window (depending on the credit scoring model) means all inquiries are counted as a single hard pull. The long-term effect of refinancing on your credit is generally neutral.
What is a cash-out refinance?
A cash-out refinance replaces your existing mortgage with a larger loan and gives you the difference in cash. For example, if you owe $300,000 on a home worth $500,000, you might refinance for $380,000 and receive $80,000 cash to fund renovations, pay off high-interest debt, or invest. The full $380,000 is now your mortgage balance. Cash-out refinances carry higher rates than rate-and-term refinances and restart your amortisation clock on the increased balance.
Should I refinance if I plan to move in 3 years?
Run the break-even calculation first. If closing costs are $8,000 and the monthly saving is $250, the break-even point is 32 months — just under 3 years. In that case it is borderline, and unexpected transaction costs or a sale before 32 months would leave you out of pocket. If break-even is 48+ months and you plan to move in 3 years, refinancing does not make financial sense. A no-closing-cost refinance shifts this calculation by eliminating the upfront outlay.