Refinancing
A refinance is a purchase you make from yourself
The payment going down is not the same as the loan getting cheaper. Those are two different tests, and only one of them survives a longer term.
Refinancing replaces one note with another. Whether that is worth doing depends on the rate, the costs, and — the part most calculators quietly skip — what happens to the term. A thirty-year loan restarted four years in means paying the first four years of interest twice.
- 01
Work out what you are actually solving
A lower rate, a shorter term, cash out, or a lower payment because cash flow is tight. These pull in different directions and the right answer differs for each.
- 02
Get the real cost, not an estimate
Ask for a Loan Estimate. Lender fees, title, appraisal and recording are all on it, and the total is what the break-even is measured against.
Rolling the costs into the balance does not make them disappear. It moves them into interest.
- 03
Test both break-evens
Cash-flow break-even is how long the payment saving takes to repay the cash you handed over. Total-cost break-even is when the refinance is genuinely cheaper. The second is the honest one.
- 04
Decide about the term deliberately
Keeping the same remaining term makes the comparison clean. Extending it lowers the payment and raises the cost, which can still be the right choice — but should be a choice.
- 05
Check what you lose
An assumable FHA or VA loan is worth something to a future buyer. A very low rate is worth something to you. Neither survives a refinance.
Worth knowing
The parts that surprise people
Cash-out is a different product
Taking equity out raises the balance and usually the rate. It is often the cheapest money available to a homeowner, and it is still debt secured on the house you live in.
Removing mortgage insurance may not need a refinance
Conventional PMI ends automatically at 78% of the original value and can be requested at 80%. If that is the only reason you are refinancing, ask the servicer first.
A streamline is not always cheaper
FHA and VA streamlines skip documentation, which is convenient. They still carry fees, and a VA streamline carries its own funding fee.
Do the arithmetic
Three calculators that answer this
- When does a refinance pay for itself?Refinance break-evenA new rate against the costs of getting it, on cash flow and on total cost separately.
- Where does each payment actually go?Amortisation scheduleEvery payment, month by month or year by year, with a running total and the balance curve.
- What does paying extra buy me?Extra payment calculatorA recurring overpayment, a one-off, or an annual lump, against interest saved and months removed.
Questions
Refinancing
How much does the rate have to drop?
There is no threshold, despite the folklore about one per cent. What matters is the cost of the refinance against the interest it avoids over the time you will actually keep the loan. On a large balance a quarter of a point can pay back quickly; on a small one a full point may never.
Should I roll the costs in?
It depends on whether cash or total cost is the constraint. Rolling them in means nothing leaves your pocket, so the cash-flow break-even disappears — but the costs now accrue interest for the life of the loan, and the total-cost break-even moves out.
What is a recast?
A large lump payment followed by the servicer re-amortising the remaining balance over the remaining term, which lowers the payment without a new loan. It usually costs a few hundred dollars rather than a few thousand, and not every servicer offers it. Worth asking about before assuming a refinance is the only route to a lower payment.
Or start from the income
The five routes
Demonstration form
Have someone look at it
If this were a working site, this is where the conversation would start.