Should you refinance your mortgage?
Compare your current loan against a new one and see exactly when the savings catch up with closing costs. The break-even point is where refinancing actually starts paying you back.
Your existing loan
Refinanced loan
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How refinancing actually works.
Refinancing replaces your current mortgage with a new one — usually at a lower rate. You pay closing costs upfront (typically 2–5% of the loan), and in exchange your monthly payment drops. The catch: those closing costs need to be earned back through monthly savings before refinancing actually saves you money.
That moment is called the break-even point. Before it, you’re underwater on the deal. After it, every payment is pure savings.
The break-even rule
The math is simple:
- Closing costs ÷ monthly savings = months to break even
Example: $6,500 in closing costs. New payment saves $190/month. $6,500 ÷ $190 = 34 months. If you keep the loan longer than 34 months (~3 years), refinancing pays off. Sell or refinance again before that, and you’ve lost money.
If you’ll stay in the home longer than the break-even point — usually 24 to 60 months — refinancing makes sense. Shorter than that, and the closing costs eat your savings. The longer you stay past break-even, the more refinancing pays you back.
When refinancing makes sense
Rate drops by 0.75% or more
The traditional rule was 1% — but with today’s higher loan amounts, even a 0.75% drop can save tens of thousands over the life of the loan. The bigger the rate gap, the faster the break-even.
You’ll stay in the home long enough
Run the break-even calculation. If you might sell or refinance again before that point, the math doesn’t work, no matter how attractive the rate looks.
You want to switch loan types
Going from a 30-year to a 15-year saves enormous interest. Going from an ARM to a fixed rate locks in stability. Both are valid reasons to refinance even if monthly savings are modest.
You need to remove PMI
If your home value has risen and you now have 20%+ equity, refinancing into a conventional loan eliminates PMI — sometimes saving $100–$300/month even without a rate drop.
When refinancing is a bad idea
Don’t refinance just because rates dropped slightly. Don’t refinance to extend a loan you’re 25 years into — you’ll pay more interest overall even at a lower rate. Don’t refinance if you might sell within the break-even window. Don’t refinance to “cash out” for non-essential spending — you’re putting your home up as collateral for vacations or cars.
Frequently asked questions
How much should rates drop before I refinance?
The old rule was 1%, but with today’s loan amounts even a 0.75% drop can produce meaningful savings. What matters more than the rate drop is your break-even point — if it’s under 24 months and you’ll stay in the home longer than that, refinancing usually makes sense.
What are typical closing costs?
Refinance closing costs usually run 2% to 5% of the loan amount. On a $300,000 refinance, expect $6,000–$15,000. This includes the appraisal, title insurance, origination fees, recording fees, and prepaid items. Some lenders offer “no-closing-cost” refinances by rolling fees into the loan or charging a slightly higher rate.
Should I pay points to lower my rate?
Calculate the break-even on the points themselves. If 1 point costs $3,000 and saves you $50/month, that’s 60 months to break even — five years. If you’ll keep the loan longer than that, points pay off. Shorter, skip them.
Can I refinance more than once?
Yes — but you’ll pay closing costs every time. Each refinance has its own break-even point. If rates drop another 1% three years after your first refi, calculate fresh: divide new closing costs by new monthly savings. Some lenders offer “no-cost” refinances if you stay with them.
Will refinancing hurt my credit score?
Temporarily, yes. The hard inquiry typically drops your score by 5–10 points, and the new account lowers your average account age. Most people recover within 6–12 months. If you’re rate-shopping, do all your applications within a 14–45 day window — they’ll count as a single inquiry.
This calculator is for educational purposes only. Estimates are based on the inputs you provide and do not constitute a loan offer or financial advice. Actual loan terms, rates, fees, and total costs will be determined by your lender based on credit history, income, debt-to-income ratio, and other factors. Closing costs vary widely by state, lender, and loan size.