In more detail
The new loan pays off the old one, but it brings closing costs, often a few percent of the loan. Divide those costs by the monthly saving to find the break-even point; refinancing pays off only if you keep the loan longer than that. A rate-and-term refinance changes the rate or term; a cash-out refinance borrows more than you owe and hands you the difference, raising the LTV. Restarting a 30-year term can raise total interest even with a lower rate, so compare total remaining cost, not just the payment.
Why it matters
A lower payment is not the same as a cheaper loan. Stretching the remaining term or rolling closing costs into the balance can make a "saving" cost more over the life of the loan.
Example
You owe $250,000 at 7% with 25 years left: payment $1,766.95, remaining interest $280,084.40. Refinancing at 6% with $5,000 of closing costs:
| Option | Payment | Monthly saving | Total interest | Break-even |
|---|---|---|---|---|
| New 30-year loan | $1,498.88 | $268.07 | $289,595.47 | 18.7 months |
| New 25-year loan | $1,610.75 | $156.19 | $233,226.05 | 32.0 months |
The 30-year loan has the lower payment but costs $9,511.07 more interest than keeping the old loan; the 25-year loan saves $46,858.35.