The idea, and why it is tempting
If you wait for rates to fall, you risk competing with more buyers when they do and paying a higher price. If you buy now, you pay today’s rate, but you can refinance when the numbers work. The logic is sound only if the numbers do work, and if you could live with the higher payment if they never do. Nobody can predict mortgage rates. The buying power calculator shows what a lower rate would be worth on your own budget, so you know what you would gain by waiting versus buying now.
Mortgage payment and buying power
The monthly payment on a home price, and the price a monthly budget supports.
The calculator loads as you scroll. Open the full mortgage calculator if you prefer.
Assumptions
- Principal and interest from the standard payment formula; property tax and insurance entered by you.
- Buying power uses your monthly budget only; lenders also weigh income, debts and credit.
- Rates are your input, not a quote.
The break-even math
Say you buy with a $400,000, 30-year loan at 7.00% (payment $2,661.21). Two years later your balance is about $391,580 and rates have dropped to 6.00%. Refinancing into a new 30-year loan would cost an assumed 3% in closing costs, about $11,747.
| Keep current loan | Refinance to 30 years at 6% | Refinance to 28 years at 6% | |
|---|---|---|---|
| Monthly principal & interest | $2,661 | $2,348 | $2,409 |
| Monthly savings | $313 | $253 | |
| Closing costs (assumed 3%) | $11,747 | $11,747 | |
| Break-even | 37.5 months | 46.5 months |
The 28-year version keeps your original payoff date, so the savings are smaller but the interest you save is real; the 30-year version restarts the clock and lowers the payment more, but you pay interest for two extra years. If you stay past the break-even, the refinance pays for itself. If you sell first, you lose the closing costs. The full refinance break-even calculator lets you test your own loan, including cash-out and term changes.
What can stop a refinance
- Rates do not fall, or fall less than you need after counting closing costs.
- Your credit score, income or debt changes and you no longer qualify for the best rate.
- The home's value drops, so your loan-to-value is higher and you may face mortgage insurance or a worse rate.
- Your remaining time in the home is shorter than the break-even.
- Closing costs are higher than you assumed, or the loan has a prepayment penalty.
Ways to prepare for the plan to fail
- Qualify and budget at today's rate. Treat a lower payment later as a bonus, not a requirement.
- Keep an emergency fund so the higher payment is survivable during a refinance delay.
- Ask for a loan with no prepayment penalty.
- Keep your credit strong and your debt low so that you qualify later.
- Keep records of your home's value and improvements.
Alternatives to "buy now, refinance later"
- Buy down the rate with points. See mortgage points and the permanent buydown.
- Use a temporary buydown if a seller or builder offers one, and be sure you can afford the full payment. See 2-1 buydown vs permanent buydown.
- Consider an adjustable-rate mortgage if you plan to move within the fixed period. See ARM vs fixed.
- Make a larger down payment, or use extra principal payments or a recast to lower your payment later. See mortgage recasting.
Each of these has its own costs, so compare them rather than assuming the refinance will be the cheapest path: mortgage points, 2-1 vs permanent buydowns, ARM vs fixed and mortgage recasting. If you are still choosing a lender, compare Loan Estimates and decide whether to lock using the rate lock guide.
Sources and further reading
Written by the Reaixo editorial team. Last reviewed . Educational information, not financial, legal or tax advice.