Should I refinance my mortgage?
A clear comparison of refinancing your current loan versus taking out a new purchase mortgage, with a simple break-even formula you can do on the back of a napkin.
Refinancing replaces your existing mortgage with a new one. A purchase mortgage is the original loan you take to buy a property. They share most of the same underwriting steps - credit, income, appraisal, title - but they differ in cost structure, timing, and the reasons you would consider one over the other.
Quick side-by-side
| Refinance | New purchase | |
|---|---|---|
| Goal | Lower rate, change term, pull equity, drop PMI, switch program | Acquire a property |
| Typical closing costs | 2% - 4% of loan amount; can sometimes be rolled in | 2% - 5% of loan amount; paid at closing |
| Down payment | None - existing equity counts | 0% to 20%+ depending on program |
| Speed | 30 - 45 days | 30 - 45 days |
| Appraisal | Often required; some streamline products waive it | Required |
| Best when | New rate beats current rate by 0.5%+ AND you stay long enough to recoup costs | You are buying a home; rate matters but is secondary to fit and price |
| Risk | You restart the clock on interest paid; closing costs can erase savings | Locked into property and loan for some years before refinancing makes sense |
The break-even calculation
The simplest way to decide whether a refinance makes sense is the break-even-in-months formula:
If your refinance closing costs are $6,000 and the new loan saves $200 a month versus your current loan, your break-even is 30 months. If you expect to keep the house and the loan longer than 30 months, the refinance pays off. If you might sell or refinance again sooner, it does not.
One important nuance: when you refinance into a new 30-year loan, you are restarting the clock. Even if your monthly payment drops, you might pay more total interest over the life of the loan because you are spreading the remaining balance across 30 years again. To avoid this, refinance into a term that finishes close to your original payoff date - if you have 24 years left, look at a 20- or 25-year fixed instead of a fresh 30-year. Or stay in the 30-year for the lower payment and pay extra principal each month.
Mini break-even calculator
Break-even: 30 months
When refinancing usually wins
- Rate is at least 0.5 to 1 percentage point lower than your current rate and you plan to stay at least three to five years.
- You can drop PMI because the home has appreciated enough to put you over 20% equity. Skip the new loan and just request PMI cancellation if you are already past 20% on the current loan.
- You want to switch out of an ARM before a rate reset, into a fixed loan.
- You want to shorten the term from 30 to 15 years, locking in much lower lifetime interest.
- You need cash out for a renovation or to consolidate higher-rate debt - though closing costs and a likely higher rate on a cash-out refi need to be weighed against alternatives like a HELOC.
When a refinance is usually a bad idea
- The rate savings are under 0.5 percentage points and the break-even is longer than you expect to stay.
- You are within five years of paying off your existing loan - the closing costs will likely exceed the savings.
- You would extend the term and end up paying more total interest, even with a lower monthly payment.
- Your credit score has dropped meaningfully since your original loan; the new offer may not be better than what you have.
If you are buying instead of refinancing
For new purchases, rate matters but it is rarely the deciding factor. The deciding factor is whether the home, the price, and the location work for you over the next five-plus years. Once you know that, optimize for total monthly cost (PITIA) within your budget, then shop for the best loan estimate from two or three lenders. Read our first-time homebuyer guide for the full step-by-step.