Refinance

Before you rely on it

What to check

Compare total remaining interest under both loans, not the two monthly payments.

The common error

Where people go wrong with refinance

Refinancing into a fresh thirty-year term eight years into a mortgage. The payment drops, the finish line moves back eight years, and the total interest often rises despite a lower rate.

Worked through

Refinance in plain numbers

A homeowner has a $300,000 balance and 30 years left at 7%, paying $1,996 a month; a new 30-year loan at 6% has a payment of $1,799, a saving of $197. Closing costs are $6,000. Divide the cost by the monthly saving: $6,000 ÷ $197, and you break even in about 30 months. Stay longer than that and the refinance pays. Move before then and it loses. There is a catch. Restarting a 30-year clock after some years gives up progress on the old schedule, so total interest can rise even as the payment falls; ask for the total cost across both loans, not only the monthly figure.

Easily confused

Refinance and its neighbours

A refinance is not a recast, a modification or a home equity loan; it replaces the existing loan with a new one, often at a different rate and term. A recast keeps the loan and reworks the payment. A modification changes terms for a borrower in difficulty. A cash-out refinance borrows more than you owe and gives you the difference, and a home equity loan adds a second debt beside the first. Rate-and-term refinances change only the rate or term. Each has different costs and risks.

In real decisions

Where refinance turns up

Borrowers refinance to lower their rate, shorten the term, switch from adjustable to fixed or extract equity; businesses and landlords refinance property loans. Student loan borrowers refinance to combine or reduce rates, sometimes giving up protections; the decision depends on rate savings, costs, time in the home and total interest. A break-even calculator shows the time to recover the costs. Shopping several lenders compares closing costs and rates.

Know the edges

Where refinance stops being reliable

Closing costs, appraisals and credit requirements matter. Rates can change between quote and lock. Resetting the term increases total interest unless you keep paying at the old schedule. Refinancing federal student loans into private ones removes federal benefits. Points and fees affect the true cost. Compare offers using APR and total cost, and be honest about how long you will keep the loan.

Quick answers

What people ask about refinance

When does refinancing make sense? When the savings recover the costs within the time you expect to keep the loan, or when you need to change the loan type or term. Compare the total cost, not just the monthly payment.

Does refinancing hurt my credit score? A new application creates an inquiry and a new account, which can lower a score slightly for a short time. Paying on time restores it.

What are closing costs on a refinance? Fees for appraisal, title, lender charges and taxes can total a few thousand dollars. Ask for a loan estimate and compare several lenders.