How do I calculate mortgage refinance savings?
Refinance savings are calculated in two steps. Step 1 — Monthly savings: Compare your current monthly payment (P&I on remaining balance at current rate for remaining term) with the new monthly payment (same balance at new rate for new term). Example: $300,000 balance, 25 years remaining at 6.5% → $2,024/month. Refinancing to 5.5% over 25 years → $1,842/month. Monthly savings = $182. Step 2 — Break-even: Divide total closing costs by monthly savings. Closing costs of $4,000 ÷ $182/month = 22 months to break even. If you plan to stay beyond 22 months, refinancing makes financial sense. Total 25-year savings: $182 × 300 months = $54,600 (before accounting for the closing cost and opportunity cost of that capital).
What closing costs should I expect when refinancing a mortgage?
Refinance closing costs typically run 2–5% of the loan balance, or $3,000–$9,000 on a $200,000 refinance. Major components: Origination/lender fee — $1,000–$3,000 (sometimes expressed as "points" — 1 point = 1% of loan). Appraisal — $300–$600. Title search and insurance — $500–$1,000. Government recording fees — $50–$200. Attorney fees (where required) — $500–$1,500. Prepaid interest and escrow — varies. Some lenders offer "no-closing-cost" refinances that roll costs into the loan balance or charge a slightly higher rate. These can make sense if you plan to sell or refinance again within a few years. Always ask for a Loan Estimate within 3 business days of application — this standardized form lets you compare costs across lenders.
When is it worth refinancing a mortgage?
The classic "2% rule" (refinance if you can drop the rate by 2%) is outdated — modern guidance is more nuanced. Refinancing makes sense when: Your break-even period is shorter than your planned stay. As a rule of thumb, if you plan to stay 3+ years and can drop the rate by 0.75–1%+, the math typically works. You can shorten the term without unacceptable payment increases — refinancing from a 30-year to a 15-year dramatically reduces total interest paid (a $300,000 loan at 6% costs $347,000 in interest over 30 years but only $155,000 over 15 years, despite a higher rate). You need to access equity (cash-out refinance). Interest rates have dropped at least 0.5–1% since your original loan. You can eliminate PMI by reaching 20% equity. Avoid refinancing if: You are near the end of your loan (most interest is already paid — you're in the principal-heavy phase). You plan to sell soon (closing costs won't be recovered).
What is the difference between rate-and-term refinance and cash-out refinance?
Rate-and-term refinance replaces your existing mortgage with a new loan at a lower interest rate and/or different term. The principal balance stays roughly the same (only closing costs may be rolled in). Goal: reduce monthly payment, reduce total interest paid, or shorten the payoff timeline. Cash-out refinance replaces your mortgage with a new, larger loan and you receive the difference in cash. Example: $250,000 remaining mortgage, home worth $400,000. Cash-out to $300,000 → receive $50,000 cash at closing. Uses: home renovation, debt consolidation, college funding, investment. Considerations: you are increasing your mortgage debt and resetting your amortization schedule. Interest rates on cash-out refis are typically 0.125–0.375% higher than rate-and-term. Cash-out interest is tax-deductible only if used for home improvement (post-2017 tax law). Lenders typically require 20% equity remaining after the cash-out (max 80% LTV).
Should I refinance to a 15-year or 30-year mortgage?
The 15-year vs 30-year decision involves three tradeoffs. Interest rate: 15-year rates are typically 0.5–0.75% lower than 30-year rates. Monthly payment: 15-year payments are ~40–50% higher for the same loan amount. Example: $300,000 at 6% → 30-year = $1,799/month; 15-year at 5.5% = $2,454/month (+$655). Total interest paid: 30-year = $347,000 in interest; 15-year = $141,000 — saving $206,000. Choose 15-year if: you can comfortably afford the higher payment, you value being debt-free faster, you are within 20 years of retirement, or you have significant equity already. Choose 30-year if: cash flow is tight and the payment difference would strain your budget, you can invest the monthly savings at a higher return than your mortgage rate (this is the mathematical case for keeping a low-rate mortgage and investing the difference), or you want payment flexibility.