Quick comparison
| Rate-and-term refi goal | Lower payment or shorter term |
|---|---|
| Cash-out refi goal | Access equity (higher balance) |
| Typical closing costs | About 2–5% of loan amount |
| Break-even focus | Months until costs are recovered |
| Watch-out | Resetting a 30-year clock |
When refinancing makes sense
Refinancing replaces your current mortgage with a new one — usually to secure a lower interest rate, shorten your term, switch from an adjustable to a fixed rate, or tap home equity. A common rule of thumb is that refinancing is worth considering when you can lower your rate by roughly 0.5–1% and plan to stay past the break-even point on closing costs. The better test is personalized math: new payment, costs, and how long you will keep the loan.
Understanding your break-even point
Refinancing isn't free: expect closing costs of roughly 2–5% of the loan amount unless you take a lender credit in exchange for a higher rate. Divide those costs by your monthly savings to find the break-even point in months. If you will stay longer than that, the refinance typically pays off on payment alone — then check total interest, because restarting a 30-year term can erase savings if you already had few years left.
How to model a refinance in this calculator
Enter your remaining balance as the home price with $0 down (or a small cash-in amount as a down payment if you are bringing money to closing). Set the new rate and term you were quoted. Compare the new principal and interest to your current P&I, then add taxes and insurance only if you are changing escrow assumptions. For cash-out, increase the loan amount to the new balance you would carry after taking equity out.
Rate-and-term vs cash-out
Rate-and-term refinances focus on payment, rate type, or term length. Cash-out refinances add debt and often price slightly worse. If you need cash for a finite project, compare a cash-out refinance against a HELOC or home equity loan so you do not put your primary mortgage rate at risk for a short-term need.
Checklist before you apply
- Gather your current balance, rate, remaining term, and monthly P&I.
- Get a Loan Estimate and list all lender and third-party fees.
- Divide total closing costs by monthly savings for break-even months.
- Decide whether you want a lower payment, shorter term, or cash-out.
- Avoid extending the loan so far that lifetime interest rises despite a lower rate.
For the formulas behind every estimate, see how we calculate.