When interest rates drop, millions of homeowners rush to their local bank to refinance their mortgages. But refinancing isn't free—it comes with thousands of dollars in closing costs. Before you sign those papers, you need to understand whether refinancing actually beats simply paying your loan off aggressively.

You can run your own custom numbers using our Home Loan Calculator to see exactly what your new monthly payment would be.

The Cost of Refinancing

Refinancing means taking out an entirely new loan to pay off your old loan. The bank charges origination fees, appraisal fees, and title fees. This usually costs between 2% and 5% of the total loan amount.

If you have a $300,000 mortgage, refinancing could cost you $9,000 upfront. You have to ask yourself: How long will it take for the lower monthly payment to make up for that $9,000? This is called the "break-even point."

The Aggressive Payoff Alternative

Instead of paying the bank $9,000 in closing costs, what if you just took that $9,000 and applied it directly to your loan principal? Furthermore, what if you increased your monthly payment by a few hundred dollars?

To see how fast you could become debt-free without refinancing, plug your numbers into our Loan Payoff Calculator. You might be shocked to find that simply making one extra mortgage payment a year can shave 5 to 7 years off your loan and save you tens of thousands in interest.

When Should You Refinance?

[!NOTE] Refinancing makes mathematical sense if you plan to stay in the home long past your break-even point, and if you can drop your interest rate by at least 1.0% to 1.5%. If you plan to move in 3 years, the closing costs will destroy any interest savings.

If you are thinking about cashing out some home equity to consolidate debt, make sure to compare the costs against taking out a separate personal loan using our Personal Loan Calculator. Sometimes, leaving your low-rate first mortgage alone is the smartest move.

Final Takeaway

Don't fall for a lender's sales pitch. Use our Home Loan Calculator and Loan Payoff Calculator to compare the total interest paid under both scenarios before you decide.