Your current mortgage is at 7.5%. Rates dropped to 6%. Your lender is calling. Your neighbor just refinanced. The math seems obvious.
It’s not. And that “obvious” decision might cost you tens of thousands of dollars.
The misconception that costs homeowners billions
The standard refinance calculation goes like this:
- Monthly savings: $300
- Closing costs: $6,000
- Break-even: 20 months
Simple, right? After 20 months, you’re saving money.
This calculation is dangerously incomplete. It ignores the most important factor in any mortgage decision: how much total interest you’ll pay over the life of the loan. Lenders focus on monthly payments because that’s what sells refinances. But monthly payments and total cost are often inversely related—the lower your payment, the more you pay overall.
What the break-even calculation ignores
1. You’re restarting your amortization clock
When you refinance a 30-year mortgage into a new 30-year mortgage, you reset to Year 1. In Year 1, roughly 80% of your payment goes to interest.
If you’re 7 years into your current mortgage, you’ve finally started building real equity. Your payments are now maybe 60% interest, 40% principal. Refinance, and you’re back to 80/20.
The lower monthly payment feels like savings. It’s actually a wealth transfer—from your future self to your lender.
This is why understanding how mortgage points work matters so much. Points are another way lenders shift costs around to make deals look better than they are. The same principle applies to refinancing: what looks like savings on paper often isn’t.
2. Total interest paid over the life of the loan
Let’s run real numbers using standard mortgage amortization formulas:
Current loan (23 years remaining at 7.5% on $350,000 balance):
- Monthly payment: ~$2,572
- Total remaining payments: ~$710,000
- Total remaining interest: ~$360,000
New loan (30 years at 6% on $350,000):
- Monthly payment: ~$2,098
- Total payments over 30 years: ~$755,000
- Total interest over 30 years: ~$405,000
You “saved” $474/month. You added 7 years of payments. You’ll pay roughly $45,000 more in total interest—and that’s before accounting for the closing costs.
The monthly savings feel real because they show up in your bank account every month. The extra interest is invisible, spread across decades. But it’s just as real.
3. Closing costs are worse than they appear
That $6,000 in closing costs? It’s often rolled into the new loan balance. Now you’re paying interest on your closing costs for 30 years.
$6,000 financed at 6% for 30 years adds roughly $6,950 in interest—meaning your closing costs actually cost you nearly $13,000 total.
Your “break-even” just doubled. And most refinance calculators don’t show you this.
Even if you pay closing costs out of pocket, you need to factor in what else that money could have done. According to historical S&P 500 data, the stock market has returned roughly 10% annually before inflation over the long term. Even using a conservative 7% estimate, $6,000 invested for 20 years grows to approximately $23,000.
That’s real money you’re giving up when you refinance.
4. The hidden cost of extending your mortgage timeline
Here’s what nobody talks about: if you’re 7 years into a 30-year mortgage and refinance into a new 30-year mortgage, you’ve just committed to 37 total years of mortgage payments.
Think about what that means for your financial timeline. If you started your original mortgage at 35, you would have been mortgage-free at 65. After refinancing, you’re now looking at 72.
Seven more years of payments. Seven fewer years of that money going to retirement, travel, helping your kids, or simply having options. The lower monthly payment bought you flexibility today by selling your flexibility tomorrow.
This is the same trap people fall into with choosing a 30-year mortgage over a 15-year—the lower payment feels safer, but the total cost tells a different story.
When refinancing actually makes sense
Despite all this, refinancing can still be the right move. The key is understanding exactly what you’re trading and why.
1. You’re dropping 2+ percentage points AND shortening your term
Refinancing from 7.5% to 5.5% on a 15-year mortgage? Now we’re talking. You’ll pay vastly less total interest and build equity faster.
The conventional wisdom says a 1% rate drop justifies refinancing. That’s only true if you’re not extending your term. A 1.5% drop with a shorter term is almost always worth it. A 1% drop with the same term requires careful analysis. Any rate drop that extends your term needs to clear a much higher bar.
2. You need the cash flow and understand the trade-off
Sometimes life requires a lower payment right now. Job loss, medical expenses, family emergencies—these are real situations that demand financial flexibility.
That’s valid. Just don’t pretend it’s “saving money”—it’s borrowing from your future. If you need lower payments for survival, refinancing makes sense. If you want lower payments for lifestyle, you’re probably making an expensive mistake.
3. You’re removing PMI
If refinancing gets you out of private mortgage insurance, the math changes significantly. PMI can cost $100-300/month with zero benefit to you—it protects the lender, not you.
If your home has appreciated enough to give you 20% equity, refinancing to eliminate PMI can be worth the closing costs even without a major rate improvement. Run the numbers: PMI of $200/month for 5 years is $12,000. If refinancing costs $8,000 and eliminates that PMI, you’re ahead even if the rate doesn’t change.
4. You’re escaping an ARM before it adjusts
If your adjustable-rate mortgage is about to reset to 8%+, locking in 6% fixed makes sense regardless of other factors. The predictability of fixed payments has real value, especially if rates continue climbing.
This is one of the few situations where extending your term might be justified—trading rate uncertainty for rate certainty is a legitimate financial goal, not just a monthly payment game.
5. You’re consolidating a higher-rate second mortgage or HELOC
If you have a first mortgage at 4% and a HELOC at 9%, refinancing everything into a single loan at 6% might make sense. The blended rate matters more than any single rate. Just make sure you’re not extending the payoff timeline on money that was almost paid off.
The real refinance calculation
Before refinancing, calculate these four numbers:
- Total interest remaining on current loan vs Total interest on new loan (not monthly payment—total interest)
- Years added to your mortgage (your current remaining term vs. new term)
- True cost of closing (including interest if rolled into the loan, plus opportunity cost if paid cash)
- How long you’ll actually stay (most people overestimate this—the average homeowner moves every 8-10 years)
Then ask yourself: Am I actually better off, or does it just feel better because the monthly number is smaller?
If you can’t answer this question with specific dollar amounts, you’re not ready to refinance. The lender has done these calculations. You should too.
The decision framework
Refinance if:
- Rate drop is 1.5%+ AND you’re shortening your term
- Rate drop is 2%+ even if keeping the same term (but not extending)
- You’ll stay in the home 7+ more years (realistically, not optimistically)
- You’re paying closing costs out of pocket, not rolling them in
- You’ve calculated total interest, not just monthly savings
Don’t refinance if:
- You’re “saving” $100-200/month by extending your term
- You’ll likely move within 5 years
- You’re deep into your current mortgage (year 10+)
- The primary appeal is “lower monthly payment”
- You haven’t calculated break-even including opportunity costs
- You’re rolling closing costs into the new loan without accounting for the added interest
What to do instead of refinancing
If you want to reduce your interest costs but refinancing doesn’t make sense, consider these alternatives:
Make extra principal payments. Even $100/month extra on a $350,000 mortgage at 7.5% can save you over $50,000 in interest and cut years off your loan. No closing costs, no new loan, no paperwork.
Recast your mortgage. Some lenders allow you to make a lump-sum principal payment and “recast” your loan—recalculating your monthly payment based on the lower balance. This reduces your payment without restarting your amortization clock or paying closing costs.
Wait for better rates. If you’re only looking at a 1% drop, waiting for a larger drop might make sense. Yes, you’ll pay more interest in the meantime, but the math might work out better with a bigger rate improvement and fewer years of payments remaining.
The bottom line
Refinancing isn’t inherently good or bad. It’s a tool—one that lenders have strong financial incentives to convince you to use. Every time you refinance, they collect closing costs. Every time you extend your term, they collect more interest.
The monthly payment is the number they show you. The total interest paid is the number they hope you never calculate.
The refinance industry thrives on the gap between what feels like savings and what actually is savings. A lower monthly payment feels like progress. Paying an extra $50,000 over your lifetime doesn’t feel like anything—it’s invisible, automatic, painless. Until you realize that money could have been your retirement, your kids’ college fund, or seven years of financial freedom.
Run your own numbers. Use a full amortization calculator, not just a break-even calculator. Account for the years you’re adding, the closing costs you’re financing, and the opportunity cost of any cash you’re spending.
The extra 30 minutes of math might save you $50,000. Or it might confirm that refinancing is the right choice. Either way, you’ll make the decision with your eyes open—not because a lender told you the payment was lower.