Refinancing replaces your current mortgage with a new one, usually to capture a lower rate. Done at the right time it can save a fortune; done at the wrong time it quietly costs money in closing fees you never recoup. The decision has almost nothing to do with the rate headlines and almost everything to do with a single personal number: your break-even.
Here is how to know when refinancing actually pays.
It comes down to break-even
Every refinance has closing costs, typically 2 to 5 percent of the loan. To find whether a refi is worth it, divide those costs by the monthly payment savings, and you get the number of months to break even. Keep the loan past that point and you come out ahead; sell or refinance again before it and you lose money on the deal. That break-even, not the size of the rate drop, is the whole decision.
Enter your current loan and a new rate above to see the monthly savings and how long until you break even.
The rules of thumb, and their limits
You may hear that refinancing makes sense once rates drop by 1 percent, or half a percent. These are rough guides at best. A large loan can justify refinancing for a smaller rate drop because the dollar savings are bigger; a small loan may not be worth it even for a large drop. Ignore the generic thresholds and run your own break-even, which accounts for your actual balance and costs.
Refinancing a 30-year loan you are ten years into with a fresh 30-year term can lower the payment while adding years and total interest. Refinance into a term that keeps you on track, not one that restarts the clock.
When not to refinance
Sometimes refinancing is the wrong move regardless of the rate. Skip it if you plan to move or pay off the loan before break-even, if the new loan stretches your term so far that total interest rises, or if your credit or equity have slipped enough that you would not qualify for a good rate. And a cash-out refinance, which raises your balance to pull equity, follows different math and different risks; weigh it separately.
Run your break-even above, and if you will keep the loan past it, refinancing is usually a clear win. Our mortgage guide covers the full picture.
Frequently asked questions
When should I refinance my mortgage?
When the monthly savings from a lower rate recoup the closing costs before you plan to sell or refinance again. Divide closing costs by monthly savings to find the break-even month, then decide if you will keep the loan past it.
Is the 1 percent rule for refinancing accurate?
It is only a rough guide. A large loan can justify a smaller rate drop, and a small loan may not be worth even a big one. Run your own break-even instead of relying on a generic threshold.
Does refinancing restart my loan term?
It can. Refinancing into a fresh 30-year term after years of payments lowers the payment but adds years and interest. Choosing a shorter new term keeps you on track.
When is refinancing a bad idea?
When you will move or pay off the loan before break-even, when it stretches the term enough to raise total interest, or when your credit or equity no longer qualify you for a good rate.
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