Is It Worth Refinancing My Mortgage Right Now?
Learn how to calculate your refinance break-even point and decide whether refinancing your mortgage makes financial sense in your situation.
What Refinancing Actually Means
Refinancing replaces your existing mortgage with a new one. You apply for a new loan, pay off the old one with the proceeds, and then make payments on the new loan. The new loan can have a different interest rate, different term length, or both.
The most common reason people refinance is to get a lower interest rate. If you took out a mortgage when rates were higher and rates have since dropped by 1% or more, refinancing at the lower rate reduces your monthly payment and the total interest you pay over the life of the loan.
People also refinance to shorten their loan term — for example, switching from a 30-year mortgage to a 15-year mortgage. This increases the monthly payment but dramatically reduces total interest paid and builds equity faster. Some homeowners also refinance to tap home equity as cash, though this increases the total debt owed.
The Break-Even Calculation
Every refinance comes with closing costs, typically 2% to 5% of the new loan amount. On a $300,000 refinance, closing costs might run $6,000 to $15,000. These costs eat into your savings, which means you need to stay in the home long enough for the monthly savings to offset those upfront costs.
The break-even point is calculated by dividing your total closing costs by your monthly savings. If refinancing saves you $200 per month and costs $6,000 in closing costs, the break-even point is 30 months — just over two and a half years. If you plan to stay in the home longer than that, refinancing saves you money. If you might move sooner, you could lose money.
Some lenders offer no-closing-cost refinances, where the costs are rolled into the loan balance or exchanged for a slightly higher interest rate. These can be attractive if you are not certain how long you will stay, but you should understand that the costs are still there — they are just structured differently.
When Refinancing Makes Sense
The traditional guidance is that refinancing makes sense when you can lower your rate by at least 1%. That is a reasonable starting point, but the break-even calculation matters more than any rule of thumb. Even a 0.5% rate drop might be worth it if closing costs are low and you plan to stay in the home for many years.
Refinancing makes particular sense when you are early in your loan term. In the first years of a mortgage, most of your payment goes toward interest rather than principal. Refinancing at a lower rate during this period saves the maximum amount of interest over the remaining life of the loan.
If your credit score has improved significantly since you took out the original mortgage, refinancing can also make sense even if rates have not changed much. Moving from a 720 to a 780 credit score can unlock meaningfully better rates from lenders.
When to Wait and Not Refinance
If you are far enough along in your mortgage that most of your payments now go toward principal rather than interest, refinancing resets that clock. You would start over with a new loan where the early payments are again mostly interest. The monthly payment savings might not justify restarting the amortization schedule.
If you plan to move within a few years, the break-even point calculation will likely show that you will not be in the home long enough to recoup the closing costs. Paying $10,000 to refinance and then selling two years later means you spent that money for nothing.
Also evaluate whether you can truly qualify for a better rate today. If your credit score has declined or your debt-to-income ratio has worsened since you got the original mortgage, you may not be offered the advertised rates. Always get an actual quote before making decisions based on assumptions.