Should I refinance my mortgage, and when does it make sense?

When does refinancing make sense?

The most common good reasons I see:

• Lower your rate or payment when today's rates are meaningfully below yours.
• Get rid of mortgage insurance once you have enough equity (especially off an FHA loan).
• Switch from an adjustable rate to a fixed rate before an adjustment hits.
• Take cash out for a big project or to pay off high-interest debt, when your current rate isn't much lower than today's.
• Remove someone from the loan after a divorce or a family change.

If your current rate is low and you just need cash, a HELOC usually beats a cash-out refinance, because it leaves your low rate alone.

How do I know if it's worth it? (The break-even math)

Closing costs ÷ monthly savings = months to break even.

Say a refinance costs $6,000 and saves you $250 a month. $6,000 ÷ $250 = 24 months. If you'll keep the loan longer than two years, you come out ahead. If you might sell next year, it probably isn't worth it. I'll run this for you with real numbers, not guesses.

What are my refinance options?

Option	What it does	Good to know
Rate-and-term	New rate and/or term, same balance	The classic "lower my payment" refinance
Cash-out	New, larger loan; you take the difference in cash	Usually up to 80% of your home's value on conventional and FHA loans; re-prices your whole balance
FHA Streamline	Lowers the rate on an existing FHA loan	Usually no appraisal and lighter paperwork; must give you a real benefit
VA IRRRL	Lowers the rate on an existing VA loan	Usually no appraisal; VA requires a real benefit and a 36-month recoup on costs
Conventional to drop PMI	Moves an FHA or high-LTV loan into a conventional one	Can end mortgage insurance once you have enough equity

What does refinancing cost?

• Closing costs: commonly 2% to 5% of the loan amount: lender fees, appraisal (if needed), title, escrow, and recording. They vary by state and loan.
• Prepaid items: a new escrow account for taxes and insurance, usually offset by the refund from your old one.
• Points (optional): pay upfront for a lower rate, or choose a lender credit that covers some or all costs in exchange for a slightly higher rate (sometimes called a "no-cost" refinance). I'll show you both.
• You skip a payment, not a cost: the timing of a refinance often means one month without a mortgage payment, but that interest is built into your new loan.

Example scenario (illustrative)

A homeowner in Denver has a 5/1 ARM that's about to adjust. They're planning to stay at least 7 more years. We compare a fixed-rate refinance with and without points, show the break-even month for each, and they choose the option that pays for itself in under three years, locking in a payment that won't change.

Our take

A refinance should pay for itself, period. I'll give you the break-even month in writing, and if the math doesn't work, I'll tell you to wait. When rates drop, I'd rather call you back with a real opportunity than talk you into one that isn't.