Should I Refinance My Mortgage? A Step-by-Step Checklist
Refinancing can save thousands, or quietly cost you more. Use this checklist to compare rates, closing costs, break-even time and the true lifetime cost.
When mortgage rates fall, lenders' ads promise lower payments. Sometimes refinancing is one of the best financial moves you can make. Other times a lower payment hides a higher total cost. Working through these steps will tell you which applies to you.
Step 1: know your current loan
Find your current balance, interest rate and the number of years left. Your monthly statement or online account shows all three. Note whether your payment includes escrow for taxes and insurance; compare principal and interest only, because escrow does not change when you refinance.
Step 2: get real quotes
Advertised rates assume excellent credit and often include discount points. Request a Loan Estimate from at least three lenders on the same day. The standard form makes comparison easy: look at the interest rate, the APR and section A (origination charges), plus total closing costs.
Step 3: calculate the break-even point
Divide total closing costs by your monthly savings. If refinancing costs $6,000 and saves $250 a month, you break even after 24 months. If you might sell or refinance again before then, the deal loses money.
Step 4: compare lifetime cost, not just payments
This is where many borrowers go wrong. Suppose you have 24 years left on your mortgage and refinance into a new 30-year loan. Even at a lower rate, you are adding six years of payments. Add up all remaining payments on your current loan, then all payments on the new loan plus closing costs. Only if the second number is lower does the refinance save money overall.
A practical fix is to choose a new term close to the years you have left, or to keep making your old, higher payment on the new loan. Either way you keep the lower rate without stretching the debt.
Step 5: consider the type of refinance
- Rate-and-term: replaces your loan with a new rate or term. The most common type.
- Cash-out: borrows more than you owe and pays you the difference. Useful for high-interest debt or renovations, but it increases your debt and usually carries a slightly higher rate.
- Streamline: FHA, VA and USDA borrowers may qualify for simplified refinances with less paperwork and sometimes no appraisal.
- Removing PMI: if your home has gained value, refinancing can drop private mortgage insurance even without a big rate change.
When refinancing usually makes sense
- You can lower your rate by roughly 0.75 percentage points or more.
- You plan to stay well past the break-even point.
- You want to switch from an adjustable rate to a fixed rate before it resets.
- You want to shorten your term, for example from 30 to 15 years, and can afford the payment.
When to think twice
- You are within a few years of paying off your loan; most of your payment is already principal.
- Your credit score has dropped, so you would not get the advertised rate.
- Closing costs are high relative to the savings.
- You would use a cash-out refinance to fund spending rather than investing in the home or clearing expensive debt.
Plug your numbers into the refinance calculator to see monthly savings, break-even time and lifetime savings side by side. Then try the amortization schedule calculator to see how the new loan's balance will fall over time.