PATRICK'S QUICK ANSWER
Refinance when the new rate and terms clearly beat your current loan after accounting for closing costs, or when you want to change your term or tap equity. I run the break-even on every refi and compare it against how long you will stay in the home. A lower rate only helps if you will be there past the break-even. Timing the rate matters far less than running the real numbers.
Refinance when you can meaningfully reduce your interest rate (typically 0.5-1%+ lower), when you want to switch from an ARM to a fixed rate, when you need to remove PMI, or when you want to tap equity through a cash-out refinance. The key calculation is your breakeven point: how many months until the savings exceed the closing costs. Ask Patrick whether refinancing makes sense now.
If the math works and you plan to stay in the home long enough to recover your costs, refinancing can save you thousands. If you are moving soon, the savings may never catch up to the costs.
When Rate Reduction Makes Sense
The general rule is that a rate reduction of 0.5% to 1% makes refinancing worth considering. Here is the breakeven calculation: take your total closing costs (typically 2-5% of the loan amount) and divide by your monthly savings. If closing costs are $5,000 and you save $200/month, your breakeven is 25 months. If you plan to stay past 25 months, refinancing makes sense.
When to Switch ARM to Fixed
If you have an adjustable-rate mortgage (ARM) and your fixed period is ending soon, refinancing to a fixed-rate mortgage provides payment certainty. This is especially important when rates are rising. The peace of mind from knowing your payment will never change is worth the refinance costs.
When to Remove PMI
If you have an FHA loan with lifetime mortgage insurance and your home has risen in value enough to give you 20% equity, refinancing to a conventional loan can eliminate that insurance entirely. That means more of your payment goes to principal every month. This is one of the most common reasons my clients refinance.
Cash-Out Refinance Timing
The best time for a cash-out refinance is when you have built significant equity, have a specific need for the funds (renovations, debt consolidation, education), and the rate on the new loan is still competitive with your current rate.
Refinance Costs
Closing costs on a refinance typically range from 2% to 5% of the loan amount. On a $300K loan, that is $6,000 to $15,000. These costs include the appraisal, origination fee, title insurance, recording fees, and prepaid items. Some lenders offer no-closing-cost refinances with a slightly higher rate.
How Long to Break Even
The breakeven calculation is critical. Calculate your total closing costs. Calculate your monthly savings (difference between old and new payment). Divide costs by savings. If you plan to stay in the home longer than the breakeven period, refinance. If you are moving before then, the savings never catch up.
Ask Patrick about refinancing
Get a straight answer on breakeven, rates, and when refinancing pays.
