01
Types of Refinancing
Rate-Term
Lower rate or shorten term without changing loan amount. Most common and least risky type.
Cash-Out
Borrow more than owed; receive the difference in cash. Accesses home equity but increases loan balance.
Streamline
Simplified refi for FHA/VA borrowers. Reduced documentation; no appraisal in many cases.
02
Break-Even Analysis
The break-even point is the number of months it takes for monthly payment savings to recoup closing costs. Any refinance that extends your time in the home beyond break-even has a positive expected value.
Break-Even Formula
Break-Even (months) = Total Closing Costs ÷ Monthly Payment Savings | Example: $8,000 closing costs ÷ $250/month savings = 32 months (2.7 years). If you plan to own for 5+ years, refinance.
Refinance Scenarios — $400K Loan, Various Rate ReductionsIllustrative
| Current Rate | New Rate | Monthly Savings | Closing Costs | Break-Even |
|---|---|---|---|---|
| 7.5% | 7.0% | $136/mo | $8,000 | 59 months |
| 7.5% | 6.5% | $276/mo | $8,000 | 29 months |
| 7.5% | 6.0% | $421/mo | $8,000 | 19 months |
| 7.5% | 5.5% | $572/mo | $8,000 | 14 months |
03
Cash-Out Refinance Considerations
Cash-out refis convert home equity into cash — useful for home improvements, debt consolidation, or investment. However, they come with important trade-offs:
- Higher rate — Cash-out refis carry LLPAs of 0.375–0.625% above rate-term refis at the same LTV.
- LTV cap — Conventional cash-out is typically capped at 80% LTV. FHA: 80%. VA: 90%.
- Resets amortization — Taking out equity in year 15 of a 30-year mortgage and refinancing to a new 30-year term adds 15 years of interest payments.
- Tax implications — Interest on cash-out above the original acquisition debt may not be tax-deductible under current IRS rules — consult a tax advisor.
