When Does Refinancing Make Sense?
Refinancing replaces your current mortgage with a new one, ideally with better terms. It makes sense when the savings outweigh the costs and you'll stay long enough to break even.
Key reasons to refinance:
- Lower interest rate (save on monthly payments and total interest)
- Shorten loan term (pay off faster, build equity)
- Switch from ARM to fixed rate (stability)
- Cash-out refinance (access home equity)
- Remove PMI (if you have 20%+ equity)
The 2026 Loan Limits
Important thresholds for 2026 (per federal guidelines):
| Loan Type | 2026 Limit | Notes |
|---|---|---|
| Conforming (1-unit) | $832,750 | Baseline for most areas |
| High-cost conforming | $1,249,125 | For designated high-cost areas |
| FHA Floor | $541,287 | Minimum FHA limit |
| FHA Ceiling | $1,249,125 | Same as high-cost conforming |
Why Limits Matter
The Break-Even Point
The break-even point tells you how long it takes to recover refinancing costs through monthly savings:
Break-Even = Closing Costs ÷ Monthly Savings
In months
Rule of thumb: If you plan to stay in the home longer than the break-even point, refinancing is likely worth it.
Common Refinancing Costs
| Cost | Typical Range | Notes |
|---|---|---|
| Origination fee | 0.5-1% of loan | Lender's processing fee |
| Appraisal | $300-$700 | Required for most refis |
| Title insurance | $500-$1,500 | Varies by state |
| Recording fees | $50-$250 | County recording |
| Credit report | $30-$50 | One-time fee |
| Points | 1% per point | Optional, to buy down rate |
Total closing costs typically range from 2-5% of the loan amount.
No-Closing-Cost Refinance
Rate and Term vs Cash-Out
Rate and Term Refinance
Simply replaces your current mortgage with a new one at different rate/term. No cash extracted. Usually offers the best rates.
Cash-Out Refinance
Take out a new, larger loan and pocket the difference as cash. Useful for home improvements, debt consolidation, or major expenses.
Cash-Out Caution
When NOT to Refinance
- You're moving soon (won't reach break-even)
- Rate drop is less than 0.5-0.75%
- You're extending term on a nearly paid-off loan
- Your credit score has dropped significantly
- You're already years into a mortgage (paid mostly interest)
- Closing costs are unusually high
Refinancing Steps
- Check your credit score (740+ gets best rates)
- Gather income and asset documentation
- Get quotes from multiple lenders (at least 3-5)
- Calculate break-even for each offer
- Lock your rate when ready
- Complete underwriting and appraisal
- Review closing disclosure
- Close and start new payments
Frequently Asked Questions
Q: How much can I save by refinancing?
A: It depends on rate drop, loan size, and term. A 1% rate drop on a $300,000 loan can save $150-200/month and $50,000+ in total interest over 30 years.
Q: Is it worth refinancing for 0.5%?
A: Maybe. On large loans, 0.5% still saves significant money. Calculate break-even and total savings. If you're staying long-term, even small drops can be worthwhile.
Q: Should I refinance to a shorter term?
A: If you can afford higher payments, yes! A 15-year loan has lower rates and builds equity faster. But don't stretch your budget too thin.
Q: Can I refinance with bad credit?
A: It's harder and more expensive. FHA streamline refinance has more lenient requirements. You may need to improve credit first.
Q: How long does refinancing take?
A: Typically 30-45 days. Can be faster with online lenders or if your situation is straightforward.
Q: Should I pay points?
A: Points make sense if you'll stay long enough to recoup the upfront cost. Calculate break-even just like closing costs.
Refinance Calculator Tips
- Enter your actual current payment and balance (check statement)
- Get real quotes for closing costs — estimates vary widely
- Compare both monthly savings AND total savings
- Factor in how long you plan to stay in the home
- Consider the impact of extending your term (more interest over time)
This calculator provides estimates. Actual rates and costs depend on your credit, property, and lender. Get official loan estimates before making decisions. This is educational content, not financial advice.