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How to refinance your mortgage

When refinancing actually makes sense, how to compare options honestly, and the rate-trap to watch for.

Last updated April 2026

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A refinance replaces your existing mortgage with a new one. People refi for three reasons: to lower their rate, to change their term, or to pull out cash. Whether it’s worth the cost depends on math you can do in about 5 minutes — but most people get the framing wrong.

The right way to think about a refi

The wrong question: “Will my monthly payment go down?”

The right question: “Will I save more in interest than I spend on closing costs, given how long I’ll keep this loan?”

That’s the break-even calculation. If your closing costs are $6,500 and you’ll save $400/month, you break even in 16 months. If you’ll keep the loan past 16 months, refi wins. If you’d sell or refinance again before then, refi loses.

The Refinance Breakeven calculator does this honestly, including the after-tax view (mortgage interest deduction) and the NPV view (discounting future savings against what you could earn investing the closing costs instead).

When a refi probably makes sense

  • Rate dropped meaningfully — typical rule of thumb is your new rate should be at least 0.75% below your current rate to clear closing costs in a reasonable timeframe.
  • You’re staying put — the longer your remaining horizon, the more time you have for monthly savings to outpace upfront costs.
  • You can drop PMI — if your home appreciated and you now have ≥20% equity, refinancing to conventional drops PMI immediately (vs waiting for HPA cancellation).
  • You want a different term — going from 30-yr to 15-yr saves enormous interest if you can afford the higher payment.
  • You have an FHA loan with life-of-loan MIP — refinancing to conventional once you have 20% equity is the only escape from FHA MIP for post-2013 low-down-payment FHA loans.

When a refi usually doesn’t make sense

  • You’ll move within 2–3 years — break-even rarely happens that fast.
  • Your current rate is already below today’s — this is the rate trap (more on this below).
  • The savings are marginal — a 0.25% rate drop on a $300k loan saves about $50/month. If your closing costs are $5,000, break-even is 100 months. Not worth it.
  • You’d reset the term clock without dropping the rate — extending a 22-year-remaining loan back to 30 years lowers your payment but increases lifetime interest.

The rate trap

The single most expensive refi mistake is taking a cash-out refi when your existing rate is below today’s rate.

Why: a cash-out refi replaces your entire mortgage at the new rate. You’re not just borrowing the new cash at 7%; you’re also re-pricing the existing $300k balance from 4% to 7%.

A HELOC keeps your existing low-rate first mortgage untouched and only charges the higher HELOC rate on the new money. Almost always cheaper when your current rate is meaningfully below market — even when the HELOC rate looks higher than the refi rate.

Use the Cash-Out vs HELOC vs Personal Loan calculator to compare the three options on identical assumptions. The rate-trap warning fires automatically when it applies.

Cash-out refi specifics

If you’re cashing out:

  • Maximum LTV is 80% for most lenders on conventional cash-out (vs 95–97% on a purchase or rate-and-term refi).
  • Closing costs are higher than rate-and-term — typically 2–4% of the new loan amount.
  • Tax deductibility: under TCJA, interest on the cash-out portion is only deductible if proceeds are used to “buy, build, or substantially improve the home securing the loan.” A kitchen remodel qualifies; a car doesn’t.

Discount points: pay or skip?

Discount points let you buy down your rate. Typical math: 1 point (1% of the loan) lowers your rate by ~0.25%. Worth it if your hold period exceeds the break-even (usually 5–8 years). On a refi specifically, points must be amortized over the loan life for tax purposes — you can’t deduct them all in year one.

What to actually do

  1. Check your current loan terms. Note your rate, balance, months remaining, and whether you’re still paying PMI/MIP.
  2. Get rate quotes from 3 lenders. Compare on the standardized Loan Estimate.
  3. Run the Refinance Breakeven calculator with your real numbers. Look at break-even months for each scenario, plus the NPV (which accounts for opportunity cost of the closing costs).
  4. Decide your hold horizon. Be honest. If you’re likely to move in 3 years, the math changes a lot.
  5. Lock the rate. Lenders typically offer 30/45/60-day rate locks. Longer locks cost more.
  6. Submit and ride out the 30–45 day underwriting process. Like a purchase, don’t change anything financial during this window.

Common refi mistakes

  • Anchoring on monthly payment instead of total cost. Going from 22 years remaining back to a 30-year term lowers your payment but costs more in total interest.
  • Ignoring PMI in the comparison. If refinancing drops PMI immediately, that’s real savings the rate-only comparison misses.
  • Forgetting the rate trap on cash-out. See above.
  • Refinancing too soon after a previous refi. Some loans have a 6- or 12-month seasoning requirement; refi too soon and the new lender won’t fund.
  • Stretching back to a 30-year term repeatedly. Each refi resets the amortization clock; do it three times and you’ve effectively been paying interest-only.