When Does Refinancing Your Mortgage Make Sense?

Refinancing replaces your current mortgage with a new one — ideally at a lower interest rate, better terms, or both. It can save you hundreds per month or tens of thousands over the life of the loan. But it's not free, and it's not always worth it. Here's how to know.

The Break-Even Calculation

Refinancing typically costs 2-5% of the loan amount in closing costs. On a $300,000 mortgage, that's $6,000-$15,000. The key question: how many months of savings does it take to recoup those costs? Divide total closing costs by your monthly savings. If refinancing saves you $200/month and costs $8,000, your break-even point is 40 months. If you plan to stay in the house longer than that, it's worth it. If not, you'll spend more on closing costs than you save.

The Rate Drop Rule of Thumb

The old guidance was "refinance when rates drop 1% or more." That still works as a quick filter, but run the actual break-even calculation. A 0.75% drop on a large loan could save more than a 1.25% drop on a small one. The percentage isn't what matters — the monthly dollar savings and break-even timeline are.

When It Makes Sense

Rates have dropped significantly since you got your mortgage. You plan to stay in the home past the break-even point. You want to switch from an adjustable-rate to a fixed-rate mortgage for stability. You want to remove PMI (private mortgage insurance) by refinancing with 20%+ equity. You want to shorten your term (30-year to 15-year) to pay off the house faster and pay less total interest.

When to Skip It

You're planning to move within 3-5 years. The rate difference is less than 0.5%. You're far into your current mortgage (most of your payment is already going to principal). The closing costs are unusually high for the savings you'd get.