Real Estate & MortgagesAdvanced6 min read
Refinancing: when it makes sense
The math of paying off one mortgage with another one, and the mistake most refinances make.
Refinancing replaces your existing mortgage with a new one, usually at a different rate or term. People refinance to lower their monthly payment, shorten their loan, take cash out against home equity, or drop PMI. Each of those has a different cost/benefit profile.
The breakeven question
Every refi has closing costs — typically 1–3% of the loan amount. The math is: how long does it take for the monthly savings to pay back those closing costs? If it's less than the time you plan to stay in the house, refi makes sense. If not, it doesn't.
The arithmetic
Refi saves you $200/month. Closing costs are $6,000. Breakeven: 30 months. If you're moving in 2 years, the refi costs more than it saves. If you're staying 10 years, you pocket $18,000 after the breakeven. Same deal, totally different answer.
Rate-and-term refi vs. cash-out
- Rate-and-term: lower your rate or change your loan length. Low risk, high value if the math works.
- Cash-out: borrow more than you owe and take the difference in cash. Dangerous — you're turning home equity into spending money. Only makes sense for very specific uses (home improvements that add value, paying off much-higher-interest debt).
Don't restart the clock
The most common refinancing mistake: refinancing a 20-year-old 30-year mortgage into another 30-year mortgage. You might get a lower rate, but you just added 10 years of payments. If you refinance, target a 15- or 20-year loan so you don't lose the progress you've made.
Put this into practice
Worth tracks your accounts, budgets, and goals — so the concepts in this article aren't just theory.
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