Refinance break-even = total closing costs / monthly savings. Example: $5,000 closing costs, $200/month savings = 25 months to break even. If you plan to keep the home longer than break-even, refinance pays off. If you might sell or refinance again sooner, you lose money.

Closing costs run 2-3% of loan amount typically. On a $400K refi, that's $8-12K. To justify those costs, you need either substantial monthly savings (rate drop of 0.75%+) or a long expected hold period.

Common rule of thumb: refinance when current market rate is 0.5-1.0% below your current rate AND you'll stay in the home 3+ years. Below 0.5% rate improvement, the math rarely works on a standard refi.

Rate-and-term refinance keeps the loan balance roughly the same. Goal: lower the rate, change the term (e.g. 30 to 15 years), or switch from ARM to fixed. Lower closing costs since title and appraisal are simpler. LTV can go up to 95% on most programs.

Cash-out refinance increases the loan balance and gives you the difference in cash. Used for renovation, debt consolidation, or investment. Closing costs higher (full title insurance, full appraisal). LTV typically capped at 80%. Use of funds matters for tax deductibility - HELOC/cash-out interest is only deductible if used for home improvement.

Common mistake: cash-out refinance to consolidate credit card debt. The math: trading 22% credit card interest for 7% mortgage interest looks like a win, but you've also extended a $20K debt over 30 years instead of paying it off in 3-5. The total interest paid often increases. Use cash-out for consolidation only if you're committed to NOT running the cards back up.

Rate drop of 0.75%+ AND you plan to stay 3+ years. The standard scenario. The math works cleanly.

Switching from ARM to fixed before the adjustment period ends. Especially if rates have risen since you got the ARM - locking in fixed before adjustment is often worth even a small rate increase.

Removing PMI. If you have 20% equity (via paydown or appreciation), refinancing into a no-PMI conventional loan can save $100-300/month even at the same rate.

Eliminating FHA MIP. FHA borrowers with 20%+ equity can refinance into conventional and drop MIP entirely. This is typically a $200-400/month savings.

Shortening the loan term. Refinancing 30-year to 15-year accelerates equity build and saves enormous total interest. Monthly payment goes up; total cost drops dramatically.

You plan to sell within 2-3 years. Closing costs won't be recovered.

You're late in the loan term. After year 15-20 of a 30-year loan, you're paying mostly principal. Refinancing resets the amortization and you start paying interest-heavy again.

Rate drop is under 0.5%. The break-even period stretches too long.

You're using cash-out for non-investment purposes. Pulling equity for vacations or non-appreciating purchases extends debt and reduces your forced-savings rate.

FHA Streamline: existing FHA borrowers can refinance into a new FHA loan with reduced documentation, no appraisal, and faster underwriting. Available if 6+ months on current loan and 12 months of on-time payments.

VA IRRRL (Interest Rate Reduction Refinance Loan): VA equivalent. Reduced docs, no appraisal at most lenders, fast close.

These programs are designed for rate-improvement refinances. They have lower closing costs (often $2-3K vs $5-10K for a standard refi) and 14-21 day close timelines, which makes the break-even math much more attractive.

Comparing only rate, not APR. The headline rate may require buying multiple discount points. APR includes points and fees; that's the real cost number.

Not shopping multiple lenders. Same scenario can price 0.25-0.5% different across lenders. On a $400K loan over 30 years, that's $20-40K in lifetime interest.

Resetting the amortization unnecessarily. Refinancing a 23-year-remaining 30-year into a new 30-year stretches your loan by 7 years. Either refinance into a shorter term (15-20 years) or accept that you've added years to your debt.

Cashing out for low-priority purposes. Tapping equity for vacations, depreciating assets, or routine expenses converts a long-term wealth-builder into long-term debt.