Refinance break-even

Worked through. Say you owe $320,000 with 27 years left at 7.25%, and you can refinance to 6.25% for $6,000 in closing costs.

If you are confident you will still own the home in 2.4 years, the refinance pays for itself and everything after is saving. If you might move sooner, it loses money.

Three things the simple calculation misses

1. Refinancing resets your amortization

This is the big one. If you are eight years into a 30-year mortgage and refinance into a new 30-year term, you have just moved back to the beginning of the interest-heavy phase. Your payment drops, and your total interest may well rise even at a lower rate.

On our example, refinancing the remaining balance into a fresh 30-year term at 6.25% gives a payment of $1,970.30 — lower still. But total interest over that new term is $389,306 against $410,108 if you simply kept the old loan. The lower rate does not rescue the longer term.

2. Rolling costs into the loan is not free

"No closing cost" refinances usually mean the costs were added to your balance or bought with a higher rate. You still pay, with interest, for the rest of the term. Always compare on total cost over the period you expect to hold the loan.

3. Cash-out changes the question entirely

Taking equity out means a larger balance, and cash-out refinances typically carry a higher rate than a straight rate-and-term refinance. That can still be sensible — replacing 22% credit card debt with 6.5% mortgage debt is arithmetically strong — but you have converted unsecured debt into debt secured against your home. The consequence of not paying changes.

When refinancing usually makes sense

• Rates have fallen meaningfully and you will stay past break-even. The old "1% rule" is a rough heuristic; on a large balance a smaller drop can clear break-even quickly.
• Your credit has improved substantially since you took the loan — that can move your rate independently of the market.
• You want out of an ARM before it adjusts. See our fixed vs ARM guide.
• You want to drop FHA mortgage insurance, which on most FHA loans cannot be removed any other way.
• You want to shorten the term and can afford the higher payment.

When it usually does not

• You might move or sell before break-even.
• You are far into the term — most of your remaining payments are already principal, so there is less interest left to save.
• The saving comes entirely from restarting the clock rather than from a better rate.
• You would be trading a fixed rate for a variable one to chase a lower headline payment.