When does a refinance actually pay off?
Refinancing replaces your existing mortgage with a new one, ideally at a lower rate, lower payment, or shorter term. Closing costs typically run 2% to 5% of the loan balance (appraisal, origination, title, escrow). The classic rule of thumb (refinance if you can drop the rate by 1%+) is too crude; what actually matters is the break-even point, the month at which your monthly savings have repaid the closing costs.
You have $300,000 left on a 7.25% mortgage and refinance to 6.00% with $7,500 in closing costs. Monthly payment drops by about $260. Break-even is $7,500 / $260 = ~29 months. Stay in the home past month 29 and the refinance is a clear win. Sell or refi again before that and you lost money on closing costs.
Rolling closing costs into the new loan and convincing yourself the refi was ‘free’. The costs are now in your principal, accruing interest for 30 years. Pay closing costs in cash if you can, and rerun the break-even math without hand-waving the upfront expense.
A 60-second lesson on this, with a worked drill, lives inside the Finlo app. Free, forever, on the basics.