When refinancing costs more, even at a lower rate

Refinancing is sold on the monthly payment, which is the number most easily improved and least informative. Here is what to check before deciding a lower rate is a saving.

Resetting the clock

This is the one people miss. Amortisation front-loads interest — early payments are mostly interest, later ones mostly principal. Seven years into a thirty-year mortgage you have finally reached the part where you are building equity at a reasonable rate.

Refinance into a new thirty-year term and you go back to the beginning of that curve. The payment drops, and a larger share of it is interest again. Over the full life you can pay considerably more even at a lower rate.

Rolling costs into the balance

Closing costs on a refinance are real, and lenders frequently offer to fold them into the new loan so nothing is paid upfront. That is convenient and it means borrowing more than you currently owe, then paying interest on it for the life of the loan.

A "no cost" refinance is not free. The cost is either in the balance or in a higher rate. Ask which.

The break-even

Divide the total cost of refinancing by the monthly saving. That is how many months until you are ahead.

If the break-even is three years and you might move in two, it is a loss. If you are staying a decade, it is probably worth doing. Be honest about the first part — most people move sooner than they expect when they are signing.

When refinancing genuinely makes sense

• A materially lower rate, with a break-even comfortably inside how long you will stay.
• Shortening the term, which usually raises the payment and saves substantially overall.
• Removing mortgage insurance once you have enough equity, which can save more than a rate change.
• Moving out of an adjustable rate into a fixed one, buying certainty rather than saving money.
• Consolidating genuinely expensive debt — with real caution, because it converts unsecured debt into debt secured on your house.

The cash-out question

Borrowing against home equity is the cheapest money most households can access, which makes it tempting for things that should not be financed over thirty years.

Two cautions. It converts unsecured debt into debt secured on your home, which changes what is at stake if things go badly. And it stretches a short-term cost over decades, so a modest sum can cost far more than it appears.

For business owners specifically, using home equity to fund the business is a decision worth taking slowly. It can be the right call and it puts the family home behind the business in a way a business loan does not. Worth a conversation at home before one with a lender.

The comparison to run

Total remaining cost on your current loan, against total cost on the new one including closing costs, over the period you will actually hold it. Not the monthly payment.

A licensed lender can produce both figures. If one will not, that is worth noticing.