Refinance breakeven

The trap in every refinance pitch

If you're eight years into a thirty-year mortgage and you refinance into a brand new thirty, your payment drops, and you have also just signed up for thirty-eight years of paying for this house. The monthly number gets better. The total number gets worse, sometimes by quite a lot.

That doesn't automatically make it the wrong move. Cash flow is real, and there are seasons in a life where a lower payment is worth more to you than lifetime interest is. But you should make that trade knowingly rather than by accident, which is why this calculator puts both figures in front of you. Watch what happens when you set the new term to 20 or 25 years instead of 30, because you'll often keep most of the payment relief while cutting the lifetime cost substantially.

What actually counts as a closing cost

Lender fees, appraisal, title insurance, escrow, recording, and any points you pay. Prepaid items like property taxes, insurance and per-diem interest aren't really costs at all, because you'd owe them anyway. And a "no-cost" refinance isn't free either, because those costs get paid through a higher rate, which shows up here as a smaller monthly savings. So run it both ways and see which version you like.

Reasons to refinance that aren't rate

• Dropping mortgage insurance. If your home has appreciated past 20% equity, refinancing out of FHA into conventional can remove a premium that would otherwise last the life of the loan, and that's sometimes worth doing even at a slightly higher rate.
• Getting out of an adjustable rate before it adjusts on you.
• Shortening the term when your income has grown.
• Removing someone from the loan after a divorce.
• Taking cash out, though I'd compare that against a second mortgage first, especially if your existing rate is low. The HELOC comparison runs that math for you.

Common questions

What's the rule of thumb, one percent?

There isn't a good rule of thumb here, and the 1% one is bad. On a $700,000 loan a half-point is meaningful money, and on a $150,000 loan a full point may not even cover the cost of doing it. Run your own numbers instead of somebody's rule.

Does refinancing restart my escrow?

Yes. A new escrow account gets funded at closing and the old one is refunded back to you, usually within 30 days. Plan for that timing gap, because people are regularly surprised by it.

How long does it take?

Typically 30 to 45 days. Rate locks are usually written to cover that window, and I'd rather lock a little long than run out of time and have to pay to extend.