When refinancing is worth it — and when it isn’t

Refinancing is not automatically good news just because someone called you about it. Here’s the arithmetic I walk every client through.

The whole decision in one paragraph

Refinancing costs money to do. Take what the refinance will cost you in closing costs, and divide it by how much your payment drops each month. That gives you the number of months it takes to break even. If you’ll still be in the house comfortably past that point, the refinance probably makes sense. If you’re thinking about moving before then, it probably doesn’t.

That’s it. That’s the math. Everything else is detail.

The reasons that usually hold up

• The rate dropped meaningfully since you closed. The break-even math works and you’re staying put.
• You want out of mortgage insurance. If your home has appreciated and you’ve paid down the balance, restructuring can sometimes remove it — occasionally that alone justifies the whole thing.
• You want to shorten the term. Moving from a thirty-year to a shorter term can save a genuinely large amount of interest over the life of the loan, even when the monthly payment goes up.
• You’re consolidating expensive debt. Trading high-interest revolving debt for secured mortgage debt can be sensible — with one enormous caveat, below.
• You’re removing someone from the loan. After a divorce, a refinance is often the only clean way to do it.

The reasons that usually don’t

• You’re restarting the clock without noticing. Rolling into a fresh thirty-year term when you’re eight years into your current one can mean paying more total interest even at a lower rate. Look at total cost, not just the payment.
• You’re moving soon. If you won’t reach break-even, you’re paying closing costs for a benefit you’ll never collect.
• You’re consolidating debt you’re about to rebuild. If the credit cards get run back up after closing, you now have both the card balances and a bigger mortgage. I have watched this happen to good people. Be honest with yourself.
• Someone cold-called you about it. Not a reason. Run the numbers yourself, or let me run them with you at no cost.

What it costs to find out

Nothing. Send me your current balance, your rate, roughly what the house is worth, and how long you plan to stay. I’ll tell you what the break-even looks like — including when the answer is “leave it alone.” I’d rather give you that answer than a loan you didn’t need.