Should You Refinance?
Refinancing can save thousands — but only if the numbers work. This guide explains the two main types, how to calculate your break-even, and what to watch out for.
Rate-and-Term Refinance
Replaces your existing mortgage with a new one at a lower rate or different term — without extracting equity. The most common refinance type.
Pros
- ✓Lower monthly payment if rate drops
- ✓Can shorten loan term (pay off faster)
- ✓Switch from adjustable to fixed rate
- ✓No income required from equity
Cons
- ✕Closing costs (typically 2–5% of loan amount)
- ✕Restarts amortization schedule
- ✕Requires break-even analysis before committing
Cash-Out Refinance
Replaces your mortgage with a larger loan and gives you the difference in cash. Uses your home equity for a lump-sum payment.
Pros
- ✓Access large sums at mortgage rates (lower than credit cards)
- ✓Interest may be tax-deductible if used for home improvements
- ✓Single loan replaces mortgage + other debts
- ✓No separate HELOC or second mortgage needed
Cons
- ✕Increases your loan balance
- ✕New closing costs on larger loan amount
- ✕Resets loan term
- ✕Risk of over-leveraging your home
The Break-Even Point
The break-even point tells you how many months it takes for your monthly savings to cover the cost of refinancing. Only proceed if you plan to stay in the home past that point.
Break-Even Formula:
Closing Costs ÷ Monthly Savings = Break-Even Months
Example:
$6,000 closing costs ÷ $200/mo savings = 30 months
→ Stay 2.5+ years to break even
Step 1
Calculate total closing costs (ask your lender for a Loan Estimate)
Step 2
Subtract new payment from current payment to find monthly savings
Step 3
Divide total costs by monthly savings — that's your break-even in months
When Refinancing Makes Sense
Rate drops at least 0.5–1%
A 0.75% rate drop on a $400k loan saves ~$175/month. Less than that may not cover closing costs.
You plan to stay long enough to break even
If you're moving in 2 years and break-even is 3 years, it's not worth it.
Your credit score has improved significantly
A jump from 680 to 740+ can qualify you for substantially better rates.
You want to eliminate PMI
If home values rose and you now have 20%+ equity, a refi can remove PMI entirely.
You want to switch loan terms
Refinancing from a 30yr to a 15yr builds equity faster — if you can handle the higher payment.
HELOC vs. Cash-Out Refi
If you only need access to equity, a Home Equity Line of Credit (HELOC) may be cheaper than a full cash-out refinance. A HELOC keeps your existing low-rate first mortgage in place.
Compare HELOC Rates on LightStream