When rates drop, every lender calls with the same pitch: refinance and lower your payment. The payment is real. It just isn’t the whole picture.
What I learned on one of our properties
We refinanced one of our rental loans this year. The rate came down a bit over half a point and the monthly payment dropped by close to $300. That’s real money.
But we rolled the closing costs into the new loan instead of paying them up front. That made the loan balance go up, which means less equity in the building and more interest paid on those costs over the life of the loan.
The refinance was still the right call for cash flow. It just wasn’t free, and the pitch made it sound free.
The one number to work out first
Break-even months = total closing costs ÷ monthly savings.
If closing costs are $9,000 and you save $300 a month, you break even after 30 months. If you might sell or refinance again before then, the refinance probably costs you money.
Questions to ask before you sign
- What are the total closing costs, in dollars? Not a percentage. Get the number.
- Am I paying them up front or adding them to the loan? Adding them is convenient, but you pay interest on them for years.
- What does my balance look like after closing compared to the property’s value?
- Does the new loan restart the clock? Going back to a fresh 30 years lowers the payment partly by stretching it out.
- How long will I keep this property? Compare that to your break-even.
The bottom line
Judge a refinance by the break-even and the new balance, not just the new payment. The payment is what the lender leads with. The other two numbers tell you whether you come out ahead.
This is general education, not financial advice. Talk to a lender and a tax professional about your own situation.