Decision Guide
8 min read
Should I Refinance My Mortgage?
Refinancing is worth it if you can lower your rate by at least 0.75%, plan to stay past the break-even point (typically 2-4 years), and the closing costs don't exceed your savings. Here's the full framework.
The Simple Test
Refinancing makes sense when the savings outweigh the costs. That's it. Everything else is detail.
The two numbers you need: how much you'll save per month and how much it costs to refinance. Divide the cost by the monthly savings, and you get your break-even point in months.
The Break-Even Formula
| Factor | Example |
|---|---|
| Current payment (P&I) | $2,400/mo |
| New payment (P&I) | $2,100/mo |
| Monthly savings | $300/mo |
| Closing costs | $6,000 |
| Break-even | 20 months |
If you plan to stay in your home longer than the break-even period, refinancing is likely worth it. If you might move sooner, it's probably not.
When Refinancing Makes Sense
- Rate drop of 0.75%+: The old "1% rule" is outdated. With today's closing costs, even a 0.75% drop can be worth it if you're staying 3+ years.
- Removing PMI: If your home has appreciated enough to reach 80% LTV, refinancing can eliminate PMI and lower your payment.
- Switching from ARM to fixed: If your ARM's fixed period is ending and rates are reasonable, locking in a fixed rate provides certainty.
- Shortening your term: Going from 30 to 15 years dramatically reduces total interest, though your monthly payment will increase.
When Refinancing Doesn't Make Sense
- You're moving soon. If you can't recoup closing costs before you sell, you'll lose money.
- You're far into your loan. If you're 20 years into a 30-year mortgage, most of your payment is already going to principal. Refinancing restarts the clock.
- You're extending the term. Refinancing from a 30-year (with 25 years left) into a new 30-year lowers your payment but adds 5 years of payments.
- The rate difference is small. A 0.25% drop on a $200K loan saves about $30/month. With $5,000 in closing costs, that's a 14-year break-even.
Hidden Costs to Watch For
- Origination fees: 0.5-1% of the loan amount
- Appraisal: $400-600 (required for most refis)
- Title insurance: $500-1,500
- Prepaid interest: Interest from closing date to first payment
- Escrow padding: Lenders may require a new escrow cushion
The Bottom Line
Refinancing is a math problem, not an emotional one. Calculate your break-even, compare total costs, and make the decision based on how long you'll keep the loan. Use our Refinance Break-Even calculator to run your specific numbers.
Run the Numbers
Try these calculators to apply what you learned