Refinance Your Mortgage: When It Makes Sense, When It Doesn't
I've helped borrowers save thousands through refinancing — and I've also talked people out of it when the math didn't work. Here's how I think about it.
Should You Refinance? Let's Do the Math First.
Refinancing is one of those topics where everyone has an opinion and most of it is wrong. Your neighbor tells you to refinance. A headline says rates dropped. Your bank sends you a mailer. But here's what I tell every borrower who calls me about refinancing: the only question that matters is whether the math works for your specific situation.
I've been originating refinance loans for over 23 years. I've seen the 2003 refi boom, the 2008 crash (and the HARP refinances that followed), the 2020-2021 historic lows, and everything in between. The borrowers who come out ahead are the ones who refinance based on math, not emotion. And the borrowers who get burned are the ones who refinance repeatedly without understanding the true cost.
As a mortgage broker, I shop every lender in the market for your refinance — the same way I do for purchase loans. Different lenders have different refinance pricing, different closing cost structures, and different appetites for loan amounts, LTVs, and credit profiles. I find the lender that gives you the best overall deal, not just the lowest rate.
Reasons to Refinance (That Actually Hold Up)
Not every reason to refinance is a good one. Here are the scenarios where I consistently see borrowers come out ahead.
Lower Your Interest Rate
If current market rates are meaningfully lower than your existing rate and you'll stay in the home past the break-even point, a rate reduction refinance can save you significant money over the life of the loan.
Access Your Home Equity
A cash-out refinance lets you tap your equity for home improvements, debt consolidation, investment, or any other purpose. Compare this option to a HELOC — sometimes one makes more sense than the other.
Eliminate FHA Mortgage Insurance
If you bought with an FHA loan and now have 20%+ equity, refinancing into a conventional loan eliminates the 0.55% annual MIP that FHA charges for the life of the loan. This is one of the most common refinances I do.
Shorten Your Loan Term
Moving from a 30-year to a 15 or 20-year term means higher monthly payments but dramatically less interest over the life of the loan. If your income has grown since you bought, this can accelerate your path to owning the home free and clear.
Types of Refinance: What's the Difference?
Rate-and-Term Refinance
This is the most straightforward refinance. You replace your existing mortgage with a new one at a different rate, a different term, or both — but you don't take any cash out. The new loan pays off the old loan, and you start fresh with the new terms. This is what most people think of when they hear "refinance."
Rate-and-term refinances typically have the best pricing because they're the lowest risk for the lender. You generally need at least 5% equity for conventional and 3.5% for FHA. I typically recommend this when the rate reduction is significant enough that your monthly savings recoup the closing costs within 18 to 24 months.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a larger loan and gives you the difference as cash at closing. It's a way to access your home's equity without selling the property. The most common uses I see: home renovations, paying off high-interest debt, funding a child's education, or building reserves.
Conventional cash-out refinances typically allow up to 80% loan-to-value. VA cash-out refinances can go up to 100% LTV for eligible veterans (one of the best features of the VA program). Cash-out pricing is slightly higher than rate-and-term because of the additional risk, but it's still typically much cheaper than unsecured debt like credit cards or personal loans.
Cash-Out vs. HELOC: How I Think About This
When borrowers need to access equity, the first question I ask is: do you need all the money at once, or do you need ongoing access? If you need a lump sum (renovation, debt payoff), cash-out refinance is usually the cleaner option. If you need flexible, ongoing access to funds (or you're not sure how much you'll need), a HELOC may be better. The interest structure is different too — cash-out gives you a fixed rate on the full amount, while HELOCs are typically variable. I model both scenarios for borrowers so the decision is based on numbers, not guesswork.
FHA Streamline Refinance
If you currently have an FHA loan, the FHA Streamline program allows you to refinance with minimal documentation — no income verification, no appraisal in most cases. The requirement is that there must be a "net tangible benefit" — typically a lower combined rate and MIP. This program exists specifically to make it easy for existing FHA borrowers to take advantage of lower rates. You must have made at least six monthly payments and 210 days must have passed since your first payment.
VA Interest Rate Reduction Refinance Loan (IRRRL)
The VA's streamline refinance program — called the IRRRL — is similar to FHA Streamline but even simpler. Minimal documentation, no appraisal, and the funding fee is only 0.5%. If you have a VA loan and rates have dropped since you closed, this is the fastest and cheapest way to reduce your payment. Same 210-day and six-payment requirement as FHA Streamline.
Non-QM Refinance
For self-employed borrowers or investors whose income documentation doesn't fit the standard mold, non-QM refinance programs use alternative documentation: 12 or 24 months of bank statements, asset depletion, or DSCR (debt service coverage ratio) for rental properties. These programs are essential for borrowers who have strong income but complex tax returns.
The Break-Even Calculation: When Does Refinancing Pay Off?
This is the single most important number in any refinance decision. I calculate it for every borrower, and I won't recommend a refinance unless the break-even makes clear sense for your situation.
Break-Even Formula
Break-Even (months) = Total Closing Costs / Monthly Payment Savings
Example: If your refinance costs $7,500 and saves you $300 per month, your break-even is 25 months. If you plan to stay in the home for three or more years, the refinance pays for itself and then some. If you're thinking about selling within two years, it probably doesn't make sense.
What Does a Refinance Actually Cost?
Refinance closing costs typically fall between 1.5% and 3% of the loan amount. On a $400,000 refinance, expect roughly $6,000 to $12,000, which includes:
- Lender fees: Origination, underwriting, processing — these vary by lender, and as a broker I can show you the fee structure from multiple lenders
- Third-party fees: Appraisal ($400–$700 typically), title insurance, recording fees, credit report
- Prepaid items: Prorated interest, property tax escrow, homeowner's insurance escrow
- Government fees: VA funding fee (0.5% on IRRRL), FHA UFMIP (1.75% on FHA refinance)
These costs can be rolled into the new loan amount (increasing your balance but eliminating out-of-pocket cost), paid upfront at closing, or offset partially by a lender credit in exchange for a slightly higher rate. I model all three approaches so you can see the tradeoffs.
Refinance Requirements by Loan Type
| Loan Type | Min. Credit | Max LTV (Rate/Term) | Max LTV (Cash-Out) | Seasoning |
|---|---|---|---|---|
| Conventional | 620+ | 97% | 80% | 6–12 months |
| FHA | 580+ | 97.75% (Streamline) | 80% | 210 days + 6 payments |
| VA | No VA min. | 100% (IRRRL) | 100% | 210 days + 6 payments |
| Jumbo | 680–720+ | 80–90% | 70–80% | Varies by lender |
| Non-QM | 600–660+ | 80–90% | 70–80% | Varies by lender |
When Refinancing Doesn't Make Sense
I believe in being honest about this. I make money when you refinance, but I'd rather give you a straight answer and earn your trust for the next transaction. Here are the scenarios where I typically advise against refinancing:
- The rate reduction is too small. If the new rate is only 0.25% lower than your current rate and your loan balance is under $300,000, the monthly savings may not be enough to justify the closing costs within a reasonable timeframe. Every situation is different, but marginal rate drops on smaller balances rarely make financial sense.
- You're planning to sell soon. If you're going to sell the home within the next 18 to 24 months, you likely won't recoup your closing costs through monthly savings. Better to keep your current loan and sell as planned.
- You'll reset a nearly paid-off loan. If you're 22 years into a 30-year mortgage and you refinance into a new 30-year term, you're restarting the amortization clock. Yes, your payment might drop — but you'll pay more interest over the remaining life of the loan. If you're going to refinance in this situation, consider a shorter term (10 or 15 years) to avoid extending your payoff timeline.
- Serial refinancing. Some borrowers refinance every time rates dip, rolling closing costs into the loan each time. Over five or ten years, those rolled-in costs compound and erode the very savings the refinances were supposed to create. I track your total cost picture, not just the monthly payment.
I run the full analysis for every refinance inquiry — break-even, total interest over remaining term, cash flow impact — and give you an honest recommendation. If the refinance doesn't make sense, I'll tell you. And I'll set a reminder to revisit if conditions change. That's how I've built my practice over 23 years.
Why Refinance Through a Broker?
Refinancing is where the broker advantage really shines, because lender pricing on refinances varies even more than it does on purchase loans. Here's what I mean:
- Pricing competition: Some lenders are aggressive on rate-and-term refinances but expensive on cash-out. Others specialize in jumbo refinances. Others have the best VA IRRRL pricing. I know which lenders are competitive for which refinance type, and I shop them against each other for your specific scenario.
- Closing cost transparency: I show you the actual lender fees, third-party costs, and how different lenders structure their pricing. You see everything — no hidden fees, no surprises at the closing table.
- FHA-to-conventional expertise: Converting an FHA loan to conventional to eliminate MIP is one of the most valuable refinances a homeowner can do. It requires understanding both FHA and conventional guidelines, finding the right lender for your credit and LTV profile, and timing it correctly. I've done hundreds of these.
- Speed: Refinances are simpler than purchases (no real estate agents, no inspection contingencies, no negotiation timelines). I can typically close a straightforward rate-and-term refinance in 20 to 30 days.
Refinance FAQs
The questions borrowers ask me most when considering a refinance.
The most common reason is to lower your interest rate and monthly payment. The general rule of thumb is that refinancing makes sense if you can recoup your closing costs within 18 to 24 months through monthly savings — and you plan to stay in the home beyond that break-even point. But rate reduction isn't the only reason. Refinancing also makes sense to eliminate FHA mortgage insurance by switching to conventional, to access equity through a cash-out refinance, to shorten your loan term, or to convert an adjustable-rate mortgage to a fixed rate. I run the math for every scenario before making a recommendation.
Refinance closing costs typically range from 1.5% to 3% of the loan amount. On a $400,000 loan, that's roughly $6,000 to $12,000. These costs can often be rolled into the new loan amount (so you don't pay out of pocket) or offset by a lender credit in exchange for a slightly higher rate. I model both options for every borrower so you can see the tradeoff clearly. Use our mortgage calculator to estimate your new payment.
Yes. A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. Most conventional cash-out refinances allow up to 80% LTV. VA cash-out can go up to 100% LTV for eligible veterans. The funds can be used for anything — home improvements, debt consolidation, investment, education. Compare this option to a HELOC to see which structure works better for your needs.
If you have an FHA loan with less than 10% down, the MIP stays for the life of the loan — it cannot be cancelled. The only way to eliminate it is to refinance into a conventional loan. You typically need at least 20% equity and a credit score of 680 or higher for the best conventional pricing. Eliminating FHA's 0.55% annual MIP can save $150 to $250 per month on a typical loan. I review this option with every FHA borrower once they've built enough equity.
Your break-even is how long it takes for monthly savings to cover closing costs. Formula: closing costs divided by monthly savings. If your refinance costs $6,000 and saves you $250 per month, your break-even is 24 months. If you'll stay in the home beyond that point, the refinance pays for itself. I calculate this for every borrower and won't recommend a refinance unless the math clearly works in your favor.
Yes. Standard programs require two years of tax returns. If your returns understate your income, non-QM refinance programs like bank statement loans can use 12 or 24 months of deposits. For investment property refinances, DSCR programs qualify based on the property's rental income. I originate both traditional and non-QM refinances, so we use whichever path gives you the best result.
A rate-and-term refinance replaces your current mortgage with a new one at a different rate or term — you don't take cash out. A cash-out refinance replaces your mortgage with a larger loan and gives you the difference in cash. Cash-out has slightly higher rates and stricter LTV limits. The right choice depends on whether you need to access equity or simply want better loan terms. I model both scenarios for every borrower who's considering their options.
Let's See If a Refinance Makes Sense for You
I'll pull your current loan details, run the break-even analysis, and give you a straight answer. If the math works, we move forward. If it doesn't, I'll tell you that too.