The Break-Even Rule
Refinancing costs money upfront (typically 2-5% of the loan). The key question: How long until your monthly savings cover the closing costs?
Break-even = Closing costs ÷ Monthly savings
Example
- Current payment: $2,100/month (6.5% on $300,000)
- New payment: $1,896/month (5.5% on remaining balance)
- Monthly savings: $204
- Closing costs: $6,000
- Break-even: 6,000 ÷ 204 = 29 months
If you plan to stay in the home for at least 29 months, refinancing makes sense.
When Refinancing Is Usually Worth It
1. Rates Have Dropped 0.75% or More
A 1% rate drop on a $300,000 mortgage saves roughly $200/month. Over 30 years, that's $72,000.
2. Your Credit Score Has Improved
If your score improved from 680 to 760 since your original mortgage, you could qualify for significantly better rates.
3. You Want to Drop PMI
If your home has appreciated and you now have 20%+ equity, refinancing can eliminate PMI ($100-300/month savings).
4. You Want to Switch from ARM to Fixed
If you have an adjustable-rate mortgage and rates are rising, locking in a fixed rate provides stability.
5. You Want to Shorten Your Loan Term
Going from 30 to 15 years increases your payment but saves massive interest:
| Scenario | Monthly Payment | Total Interest |
|---|---|---|
| 30-year at 6.5% | $1,896 | $382,633 |
| 15-year at 5.8% | $2,496 | $149,264 |
That's $233,369 in interest savings — even with the higher payment.
When Refinancing Is NOT Worth It
- You're moving soon — Won't reach break-even
- Rates haven't dropped much — Savings don't justify closing costs
- You'll extend your loan term — Starting a new 30-year term on a loan you've been paying for 10 years means more total interest
- High closing costs — Shop around; costs vary significantly between lenders
Refinancing Costs to Expect
| Fee | Typical Cost |
|---|---|
| Application fee | $300-500 |
| Appraisal | $400-600 |
| Title insurance | $500-1,500 |
| Origination fee | 0.5-1.5% of loan |
| Total | 2-5% of loan |
Cash-Out Refinance: Proceed With Caution
A cash-out refinance lets you borrow against your home equity. You get cash, but:
- Your mortgage balance increases
- Your rate may be higher
- You're putting your home at risk for whatever you spend the money on
Only consider for: Home improvements that increase property value, consolidating very high-interest debt, or true emergencies.
Calculate Your Savings
Use our [mortgage calculator](/mortgage-calculator) to compare your current payment with a new rate and see how much you could save by refinancing.