What Is the Break-Even Point?
The break-even point is the number of months it takes for your cumulative monthly savings from the new loan to equal the closing costs you paid to refinance. If you plan to stay in your home longer than the break-even period, refinancing is likely beneficial. If you plan to move or sell before breaking even, you will not recoup the closing costs.
When Does Refinancing Make Sense?
The right threshold depends on your remaining loan balance, your closing costs, and how long you plan to stay in the home. A small rate reduction on a large loan balance can produce meaningful savings. Use the break-even calculation to make a data-driven decision.
Types of Refinancing
A rate-and-term refinance changes your interest rate, loan term, or both without significantly changing your loan balance. A cash-out refinance increases the loan balance to extract equity as cash. A cash-in refinance pays down the balance at closing to reduce the loan amount or eliminate PMI.
Refinance Closing Costs
Refinancing typically costs 2% to 5% of the loan amount in closing costs. No-closing-cost refinances roll costs into the loan balance or offset them with a higher interest rate -- both options increase total interest paid over time.