Mortgage Refinance Guide

Refinancing your mortgage sounds like a no-brainer when rates drop. But the math is more nuanced than “my new rate is lower than my old rate, therefore I should refi.” Between closing costs, resetting your amortization clock, and opportunity cost, plenty of refinances that look good on paper actually lose money. Here’s how to analyze it properly.

Forget the 2% Rule. Do the Break-Even Math.

The old rule of thumb — refinance if you can drop your rate by 2% — made sense when closing costs were lower and people stayed in homes for 30 years. It’s outdated.

The only analysis that matters: total refinance costs divided by monthly savings equals break-even in months.

Example: Your current mortgage is $350,000 at 7.25%. You can refinance to 6.25% with $5,500 in closing costs.

• Current payment (P&I): $2,388/month
• New payment (P&I): $2,155/month
• Monthly savings: $233
• Break-even: $5,500 / $233 = 23.6 months

If you’ll keep the mortgage for at least 24 months, the refinance pays for itself. After that, you’re saving $233 every month. Over 5 years past break-even, that’s $13,980 in savings.

But there’s a hidden cost that the monthly payment comparison ignores.

The Hidden Cost: Resetting the Clock

When you refinance a 30-year mortgage into another 30-year mortgage, you restart the amortization schedule. In the early years of a mortgage, most of your payment goes to interest. Five years into a 30-year loan, you’ve built a small amount of equity and are just starting to make meaningful principal payments.

Refinance into a new 30-year, and you’re back to square one — your payments are mostly interest again, and you’ve added 5 years to your payoff date.

The fix: refinance into a shorter term. If you’re 5 years into a 30-year loan, consider a 25-year or even 20-year refinance. Your monthly payment might not drop much (or could even increase slightly), but your total interest savings will be dramatic. Alternatively, refinance into a 30-year but make extra principal payments to match your original payoff date.

Types of Refinance

Rate-and-Term Refinance

The straightforward one: replace your current loan with a new loan at a lower rate, shorter term, or both. No cash out. This gets you the best rates and lowest closing costs.

When it makes sense: rates have dropped 0.5%+ from your current rate and you plan to keep the home past the break-even point. Also useful for switching from an ARM to a fixed rate if you want payment stability.

Cash-Out Refinance

Replace your current mortgage with a larger one and pocket the difference in cash. Typical limit: 80% of your home’s current value (so if your home is worth $450,000 and you owe $300,000, you can borrow up to $360,000 and take $60,000 in cash minus closing costs).

Cash-out refinance rates are typically 0.25-0.5% higher than rate-and-term. On a $400,000 loan, that premium costs roughly $50-$100/month — which adds up.

When it makes sense: you need a large lump sum for home renovations (especially value-adding renovations), debt consolidation (if you’re replacing 18% credit card debt with 6.5% mortgage debt, the math works, but only if you stop using the credit cards), or a major one-time expense. It doesn’t make sense for: vacations, cars, or lifestyle spending — you’re putting your house on the line for a depreciating asset.

FHA Streamline Refinance

This is the easiest refinance in existence. If you currently have an FHA loan, you can refinance to a lower rate with:

• No appraisal required
• No income verification
• No employment verification
• Minimal credit check (some lenders pull credit, but there’s no minimum score requirement from FHA)
• Reduced upfront MIP (0.01% instead of 1.75% if done within 3 years)

The catch: your new payment must be at least 5% lower than your current payment (the “net tangible benefit” test). You can’t take cash out. And you’re still stuck with FHA’s annual MIP — unless you refi into conventional instead, which requires a full underwrite.

VA IRRRL (Interest Rate Reduction Refinance Loan)

The VA’s version of a streamline refinance. Same concept as FHA Streamline: no appraisal, no income verification, minimal hassle. Available to any veteran with an existing VA loan.

• No appraisal required (though some lenders order one anyway)
• VA funding fee of 0.5% (much lower than the 2.15% for a purchase VA loan)
• Must result in a lower rate or switch from ARM to fixed
• Can be done with almost no out-of-pocket costs (fees rolled into the loan)

If you have a VA loan and rates have dropped even 0.5%, the IRRRL is almost always worth it. The costs are minimal and the process takes 2-3 weeks.

Cash-Out Refi vs. HELOC: Which Is Better?

If you need to tap equity, you have two main options. Here’s when each makes sense:

Cash-Out Refinance

• Fixed rate for the life of the loan — payment predictability
• Best when you need a large lump sum ($50,000+)
• Best when you plan to stay 5+ years (closing costs need time to amortize)
• Best when your current rate is close to market rate anyway (you’re not giving up a great rate)

HELOC (Home Equity Line of Credit)

• Variable rate (though fixed-rate HELOCs exist now from some lenders)
• Draw what you need, when you need it — you only pay interest on what you use
• Lower closing costs ($0-$500 for most HELOCs vs. $3,000-$6,000 for a refi)
• Best for ongoing expenses (renovation paid in stages, tuition, etc.)
• Best when you have a great existing rate you don’t want to disturb

Critical rule: if your current mortgage rate is below 5% (locked in during 2020-2021), do NOT do a cash-out refinance. You’d be replacing a historically cheap loan with a more expensive one. Get a HELOC instead — tap your equity without touching your first mortgage.

When NOT to Refinance

• You’re selling within 2-3 years. You won’t hit break-even on closing costs.
• Your loan balance is under $150,000. The monthly savings on a small loan often don’t justify the closing costs. A 0.5% rate drop on a $120,000 loan saves $50/month. At $4,000 in closing costs, break-even is 80 months — nearly 7 years.
• You’ve been paying for 15+ years on a 30-year loan. You’re finally making big principal payments. Restarting with a new 30-year throws away years of progress. If you refinance, go with a shorter term.
• You’re planning to use cash-out for consumption. A home equity tap for a $40,000 kitchen renovation that adds $30,000 in home value? Reasonable. A $40,000 cash-out for a boat? Terrible financial decision.
• Your credit has dropped significantly. If your credit score has fallen 60+ points since your original mortgage, you might not qualify for a better rate even if market rates have dropped.

Refinance Closing Costs

Expect to pay 2-5% of the loan amount in closing costs. On a $350,000 refinance:

• Origination fee: $1,750-$3,500
• Appraisal: $400-$700
• Title insurance: $500-$1,500
• Title search: $200-$400
• Recording fees: $50-$250
• Credit report: $30-$75

Total: $3,000-$6,500 typically.

Many lenders offer “no-closing-cost” refinances. The tradeoff: they roll the costs into a higher interest rate (typically 0.125-0.25% higher). This makes sense if you’re uncertain about how long you’ll keep the loan — you save nothing upfront and the higher rate is absorbed if you sell or refi again in a few years. It doesn’t make sense if you’re staying long-term — you’ll pay far more over 20-30 years than the closing costs would have been.

Frequently Asked Questions

How long after buying can I refinance?

Most lenders require you to wait 6 months after closing for a standard rate-and-term refinance and 12 months for a cash-out. FHA Streamline requires at least 6 months and 6 payments. VA IRRRL requires 210 days. There’s no legal minimum for conventional rate-and-term — some lenders will do it sooner, but 6 months is standard practice.

Does refinancing affect my credit score?

Temporarily, yes. The hard credit inquiry drops your score 5-10 points, and closing the old loan changes your credit profile. Within 2-3 months, your score typically recovers. The long-term effect is neutral — you still have the same amount of debt, just at different terms.

Can I refinance with bad credit?

Yes, but your options are limited. FHA Streamline doesn’t technically have a credit score requirement (since it doesn’t require full underwriting), making it the best option for FHA borrowers with credit problems. For conventional refinance, you need 620+. Below that, you’re looking at non-QM lenders with higher rates. The question becomes: is the rate you’ll get actually better than what you have?

Should I refinance to pay off my mortgage faster?

If you can afford the higher monthly payment, refinancing from a 30-year to a 15-year is one of the best financial moves you can make. On a $300,000 loan at 6.5% (30-year) vs 5.8% (15-year): the 15-year costs $930 more per month but saves you $224,000 in total interest and you’re mortgage-free 15 years sooner. That said, you can achieve a similar result by making extra principal payments on your existing 30-year — the advantage of refinancing is the forced discipline of the higher required payment.

Compare Refinance Offers

Ready to lower your monthly payment or tap into your home equity? Compare personalized refinance rates from multiple lenders with a single application.

Refinance Resources

Check current mortgage rates to see if refinancing makes sense at today’s levels. Use our mortgage calculator to compare your current payment against a new loan. Our best lenders guide includes refinance-specific ratings and closing cost comparisons.

Checking rates takes just 2 minutes and won’t affect your credit score. Compare offers from Credible, SoFi, LendingTree, and more.