Refinancing your mortgage
Refinancing replaces your mortgage with a new one — usually to capture a lower rate. Here is how to calculate the break-even point and decide if it is worth it.
Refinancing means replacing your existing mortgage with a new one — same home, new loan. The most common reason is a lower interest rate: even a small drop in rate reduces your monthly payment and the total interest paid over the life of the loan. But refinancing has closing costs, so the savings only materialise if you stay long enough to break even.
Real number examples
Example 1 — Rate drop of 0.75% saves $173/month
Remaining balance: $380,000. Current rate: 7.25%. New rate after refinance: 6.50%. Remaining term: 27 years.
Current P&I: $2,676/month. Refinanced P&I: $2,491/month. Monthly saving: $185. With $8,500 in closing costs, break-even is 46 months — just under 4 years. Stay longer and the savings compound.
Example 2 — Rate drop too small to justify costs
Same $380,000 balance. Rate drops only from 7.25% to 7.00% — a 0.25% reduction. Monthly savings: roughly $57. With $6,000 closing costs, break-even is 105 months — nearly 9 years. If you plan to sell or refinance again within 5 years, the numbers do not work. This is why the 0.5% rule of thumb exists.
Example 3 — Refinancing to remove PMI
If your home has appreciated significantly since purchase, a refinance can lower your LTV below 80% in one step, eliminating PMI. On a $400/month PMI charge, plus a $100/month rate reduction, total monthly benefit is $500. With $7,000 closing costs, break-even is 14 months — very compelling even for medium-term owners.
The break-even formula
Break-even months = Total closing costs ÷ Monthly savings. If you stay beyond the break-even point, every subsequent month is pure savings. Before that point, you are still in the hole. Refinancing is most powerful when rates have dropped meaningfully, you have many years left on the loan, and you plan to stay.
Frequently asked questions
When should I refinance?
The classic rule of thumb is to refinance when rates drop at least 0.5% below your current rate and you plan to stay in the home long enough to recoup the closing costs. Calculate your break-even point: divide total closing costs by your monthly savings. If closing costs are $6,000 and you save $200/month, break-even is 30 months. If you plan to stay beyond that, refinancing pencils out. Rate drops of 0.5–0.75% are the sweet spot where savings outpace costs for most loan sizes.
What are refinance closing costs?
Refinance closing costs typically run 2–5% of the loan amount in the US. They include: origination fee (0.5–1% of loan), appraisal ($400–$700), title search and insurance ($500–$2,000), recording fees ($50–$500), and prepaid interest. On a $400,000 refinance, expect $8,000–$20,000 in closing costs. Some lenders offer "no-closing-cost" refinances where they roll costs into the rate — you pay less upfront but more over time.
What is a cash-out refinance?
A cash-out refinance replaces your mortgage with a larger one and pays you the difference in cash. For example, if your home is worth $600,000 and you owe $350,000, you might refinance to a $430,000 mortgage and receive $80,000 cash (minus closing costs). Lenders typically allow cash-out up to 80% LTV on primary residences. The new, larger loan has a higher monthly payment and extends how long you carry debt. Use cash-out carefully — you are converting equity into debt.
How does refinancing affect my amortization?
Every time you refinance, the amortization clock typically resets. If you have 22 years left on a 30-year mortgage and refinance to a new 30-year loan, you are back at 30 years — even if your payment drops. You may pay less each month but more in total interest over the extended life. To avoid this, refinance into a term that matches or beats your remaining years (e.g., a 20-year refinance when you have 22 years left) or make extra principal payments to compress the actual payoff date.
Is refinancing available in Canada?
Yes, but it works differently. Canadian mortgages have short terms (typically 1–5 years) after which you renew — this is the natural refinancing opportunity without a penalty. Breaking a fixed-rate mortgage mid-term triggers an Interest Rate Differential (IRD) penalty that can be extremely large — sometimes equivalent to 12+ months of interest. Variable-rate mortgages have a smaller 3-month interest penalty. Most Canadians wait for renewal rather than break mid-term unless the savings are dramatic.
Model your refinance
Enter your current balance, remaining term, and prospective new rate in the calculator to see the payment difference and amortization impact.
Related terms: Loan-to-value (LTV) · PMI — private mortgage insurance · Principal vs interest · Mortgage term