What is Refinancing?

Refinancing means replacing your current loan with a new loan, typically at a different interest rate or term. You use the new loan to pay off your old loan, then make payments on the new loan. People refinance to lower their monthly payment, reduce their interest rate, change their loan term, or access equity.

How Does a Lower Rate Help?

A lower interest rate reduces the amount of interest you pay each month and over the life of the loan. This can significantly lower your monthly payment and total interest cost. However, you need to consider closing costs—if it takes many years to recover those costs through monthly savings, refinancing may not be worth it.

Why Can a Longer Term Cost More in Interest Even if Payment is Lower?

When you extend your loan term (e.g., from 20 years to 30 years), you're spreading payments over more months. This lowers your monthly payment, but you're paying interest for a longer period. Even with a lower rate, the total interest over the extended term can be higher than what you'd pay on the shorter term. Always compare total interest, not just monthly payments.

What is a Breakeven Point?

The breakeven point is when your monthly savings from the new loan have covered the closing costs. Before breakeven, you haven't recovered the closing costs yet. After breakeven, you start saving money. If you plan to move or pay off the loan before breakeven, refinancing may not make financial sense.

Example: If closing costs are $5,000 and your new loan saves you $200/month, your breakeven is 25 months ($5,000 ÷ $200 = 25). After 25 months, you've recovered the closing costs and start saving money.

Closing Costs: Upfront vs Rolled In

Upfront: You pay closing costs out of pocket when you refinance. This keeps your loan principal lower, reducing total interest. However, you need cash available.

Rolled In: Closing costs are added to your loan principal. You don't pay upfront, but you pay interest on that amount over the life of the loan, increasing your total cost. This can be helpful if you don't have cash available, but it's more expensive in the long run.