When Does It Make Sense to Refinance?

Key Takeaways - The break-even point is the key calculation: divide your closing costs by your monthly savings - If you will be in the home longer than your break-even period, refinancing likely makes sense - Common reasons to refinance include rate reduction, term shortening, and equity access - Refinancing resets your amortization clock — understand the total cost before you commit - Current rates relative to your existing rate determine the savings potential Refinancing replaces your existing mortgage with a new one. Done at the right time, it can save tens of thousands of dollars or free up cash for other goals. Done without the right analysis, it can cost more than it saves. Here is how to think through the decision. The break-even calculation The most important number in a refinance decision is your break-even point. The formula is straightforward: Break-even months = Total closing costs divided by Monthly payment reduction Example: You are refinancing a $300,000 loan and the closing costs are $6,000. Your new payment is $180 per month lower than your current payment. Break-even: 6,000 divided by 180 = 33 months, or about 2.75 years. If you plan to stay in the home for at least 33 months, the refinance pays for itself and then delivers $180 per month in savings for however long you stay. If you plan to sell in 18 months, you will not recoup the closing costs. Rate-and-term refinances The most common refinance lowers your interest rate, reduces your term, or both. If your current rate is 7.5% and today's market offers 6.5% on the same loan type, you may save meaningfully — and the break-even calculation will tell you whether the savings justify the closing costs. Refinancing from a 30-year to a 15-year mortgage also falls into this category. Your payment will increase, but you eliminate 15 years of interest and own your home outright sooner. Florida retirees often pursue this in their 40s and 50s so the mortgage is gone before retirement. Cash-out refinances A cash-out refinance replaces your mortgage with a larger loan and pays you the difference in cash. Florida homeowners who have built significant equity use this to fund renovations, pay off higher-interest debt, or invest. The considerations here differ from a rate-and-term refinance. You are adding to your mortgage balance, extending your payback period, and paying interest on the cash you access. Evaluate cash-out refinances against other funding sources (home equity lines of credit, personal loans) before deciding which tool makes the most sense. When rates are higher than your current rate If market rates are above your existing rate, a standard rate refinance does not make sense for savings purposes. However, a cash-out refinance may still be attractive if the alternative funding sources for whatever you need the cash for carry even higher rates. The amortization clock reset One underappreciated cost of refinancing: you restart your amortization schedule. In the early years of any mortgage, most of your payment goes toward interest rather than principal. If you refinance a 30-year mortgage in year 10 into a new 30-year, you are extending your total payback period by 10 years unless you pay it down faster. A KP Funding loan officer can model the full lifetime cost of your current loan versus a refinanced loan so you see the complete picture — not just the monthly payment comparison. KP Funding Corporation | NMLS #2442789 | Equal Housing Lender | Licensed in Florida | Not a commitment to lend. Rates subject to change.