The only number that matters: break-even
Refinancing is an investment. You pay closing costs today to buy a lower payment tomorrow. Divide the costs by the monthly saving and you get the number of months until you are ahead. If closing costs are $6,400 and you save $270 a month, you break even in 24 months. Stay in the house longer than that and the refinance was a good trade; sell or refinance again sooner and it was not.
What closing costs actually include
Typical refinance costs run 2–5% of the loan amount and include lender origination fees, an appraisal ($500–$800), title insurance and settlement fees, recording fees, and prepaid escrow. Title and settlement are often the largest line and are partly shoppable — you are not obliged to use the lender's recommended title company. Ask for a Loan Estimate from at least three lenders; the form is standardised by law specifically so the columns line up.
The term-reset trap
The most common mistake is comparing monthly payments alone. Dropping from 7.25% to 6.0% looks like a clear win — but if you also reset a 27-year-remaining loan back to a fresh 30 years, you have added 36 payments. The monthly number falls, yet lifetime interest can rise. The fix is to request a term equal to your remaining years, or keep the 30-year loan for flexibility and voluntarily pay it on the shorter schedule.
Rate-and-term versus cash-out
A rate-and-term refinance simply replaces the loan. A cash-out refinance increases the balance and hands you the difference. Cash-out rates are typically 0.25–0.5% higher and lenders usually cap you at 80% loan-to-value. Cash-out can make sense to retire credit card debt at 22%, but it converts unsecured debt into debt secured by your house — a real and often understated risk.
When refinancing is usually a bad idea
- You expect to move within the break-even window.
- Your current rate is already below market — a very large share of US mortgages are locked in below 4%, and refinancing those is almost always a loss.
- You would trade a fixed rate for an adjustable one purely to hit a payment target.
- You are close to paying the loan off, where nearly every dollar already goes to principal.
Practical sequence
Pull your credit and fix errors first — a 40-point score improvement can move your rate more than any amount of negotiating. Gather three Loan Estimates on the same day, since rates move daily. Compare the Annual Percentage Rate as well as the note rate, because APR folds in fees. Then lock, and confirm the lock expiry covers your realistic closing date.