Refinancing is paying off your current mortgage with a new one. People do it to lower the rate and payment, shorten the term, drop mortgage insurance, or pull cash out of equity. The question I care about isn’t “are rates lower.” It’s “does this pay for itself before you’d realistically sell or refinance again.” I’ll show you that number before you decide.
The break-even is the whole decision
Every refinance has a cost and a monthly savings. Divide one by the other and you get the break-even in months. If you’ll have the loan longer than that, it works. If you won’t, it doesn’t, no matter how good the rate sounds. I’ll put two or three rate-and-cost options next to each other with the break-even on each. Lower rate, more cost. Higher rate, less cost or a credit. You pick based on how long you plan to stay.
That big number on the Closing Disclosure is not your closing costs
The lender’s paperwork lumps in your new escrow account, prepaid taxes, insurance, and per diem interest, then subtracts any lender credit, and early on it’s grossed up on purpose so nothing gets under-disclosed. The escrow and prepaid pieces aren’t a cost of the refinance. They fund your new escrow account, and your current servicer refunds your old escrow balance after payoff. The things that actually differ between lenders are the rate, the origination fee, and the lender credit. Everything else trues up at closing regardless of who does the loan.
If you’re comparing lenders, line up the Loan Estimates at the same rate and compare net lender fees after credits. And watch out for APR. It rolls costs into an “effective rate” over 30 years, which pushes you toward higher upfront costs that only make sense if you keep the loan the whole time. Most people don’t.
Timing, and skipping a payment
On a refinance of your primary residence, federal rules require a three-business-day waiting period after you sign before the loan can fund. Plan for it.
The day we fund also sets your per diem interest and your first payment date. Fund early in the month and you can often skip a payment or two. That isn’t free money, it’s interest getting wrapped into the new loan, but it helps with cash flow at closing and I’ll show you exactly how it lands.
Dropping mortgage insurance
If you bought with an FHA loan, moving to a conventional loan can eliminate the monthly mortgage insurance once you have enough equity, and in many cases no traditional appraisal is needed. If you have PMI on a conventional loan and you’ve hit 20% equity, you may not need to refinance at all. Ask your servicer to remove it. If a lump sum would get you there, a recast (re-amortizing your existing loan on the lower balance, usually a couple hundred dollars) may beat a refinance.
Going to a 15-year
Rates on a 15-year typically run about 0.375% to 0.50% lower than a 30-year. The payment is higher, but far more of each payment goes to principal. If a 15-year payoff is the goal but the payment is tight, you don’t need a 15-year loan to get there. A 30-year with extra principal each month gets the same result with a safety valve.
Cash-out
A cash-out refinance replaces your first mortgage with a larger one and hands you the difference. It makes sense when your current rate is close to today’s rates anyway. If your current rate is well below market, a HELOC that leaves the first mortgage alone is usually the better tool.
I’ll run both.
How it works with me
Most refinances close in two to three weeks. Nothing on my end takes more than a day or two. Many lenders now allow a fully virtual closing: you eSign from a laptop or phone, then do a short video call where a notary checks your ID. You’re not committed to anything until you sign finals, and even then you have three days to back out.