Decide whether the refinance earns back its cost
| Situation | What to do next |
|---|---|
| Exit before break-even | The projected monthly savings do not recover the transaction cost. |
| Stay beyond break-even | Compare remaining balances as well as cumulative payments. |
| Term restarts substantially | Test a shorter new term or voluntary payment at the old amount. |
Define the real refinance cost
Include lender charges, points, third-party costs and any prepayment consequence on the existing loan. Separate escrow funding and prepaid items from costs that are actually lost.
Add lender charges, points, appraisal costs and other costs that arise only because of the new loan. Do not count escrow funding as a permanent cost without also accounting for any old escrow refund.
Compare aligned cash flows
Measure the remaining old loan against the proposed loan from the same date. If costs are added to the new balance, the amount financed and payment both need to reflect them.
Compare the new monthly principal-and-interest payment with the old one, then divide net cost by savings for a simple break-even. If the new term extends payoff, also compare balances and total repayment at the same future date.
Build a reliable cost comparison
Look beyond simple break-even
At the expected sale or payoff month, compare cumulative payments, cash paid upfront and remaining balances. This catches a term reset that looks attractive only because repayment has been stretched.
Stress-test the plan against selling, refinancing again or paying off early. A lower payment can still be a poor trade when the household will not keep the replacement loan long enough to recover its entry cost.
Keep these three outcomes separate
Simple break-even divides refinance cost by monthly savings but does not capture every consequence.
Restarting a long term can lower payment while slowing principal repayment.
Compare old and new loans through the same expected payoff date.
Primary sources
- CFPB: Buying a houseOfficial reference ↗
- CFPB: Mortgage resourcesOfficial reference ↗
Answers to check before you act
Is a lower mortgage rate enough reason to refinance?
No. Closing costs, remaining term, balance changes and how long you keep the new loan determine whether the lower rate produces savings.
Should escrow deposits count as refinance cost?
Separate refundable or balance-sheet items from charges that are consumed. Your closing documents and old servicer statement help identify the difference.