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.
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.
2. Total interest paid over the life of the loan
Let’s run real numbers:
Current loan (23 years remaining at 7.5% on $350,000):
- Monthly payment: $2,447
- Total remaining interest: $325,000
New loan (30 years at 6% on $350,000):
- Monthly payment: $2,098
- Total interest over 30 years: $405,000
You “saved” $349/month. You added $80,000 in total interest.
3. Closing costs are worse than they appear
That $6,000 in closing costs? It’s often rolled into the new loan. Now you’re paying interest on your closing costs for 30 years.
$6,000 at 6% for 30 years = $12,950 total cost.
Your “break-even” just doubled.
4. Opportunity cost of closing costs
If you paid $6,000 cash for closing costs, that’s $6,000 not invested. At 7% average market returns over 20 years, that’s $23,000 in lost growth.
When refinancing actually makes sense
Despite all this, refinancing can still be the right move:
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.
2. You need the cash flow and understand the trade-off
Sometimes life requires a lower payment right now. That’s valid. Just don’t pretend it’s “saving money”—it’s borrowing from your future.
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.
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 real refinance calculation
Before refinancing, calculate:
- Total interest remaining on current loan vs Total interest on new loan
- Years added to your mortgage (if any)
- True cost of closing (including interest if rolled in)
- How long you’ll actually stay (most people overestimate this)
Then ask: Am I actually better off, or does it just feel better because the monthly number is smaller?
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
- You’ll stay in the home 5+ more years (minimum)
- You’re not rolling closing costs into the loan
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”
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.
The monthly payment is the number they show you. The total interest paid is the number they hope you never calculate.
Run your own numbers. The extra 30 minutes might save you $50,000.