Mortgage Refinance: When It Makes Sense and How to Calculate Savings
Refinancing replaces your current mortgage with a new one, usually to get a lower rate or better terms. But it only pays off if you stay in the home long enough to recover the costs.
Why people refinance
- Lower rate — reduce monthly payment and total interest
- Shorter term — switch from 30 to 15 years to pay off faster
- Cash-out — tap home equity for renovations or debt
- Remove PMI — drop private mortgage insurance once equity hits 20%
The break-even point
Refinancing isn't free — closing costs typically run 2-5% of the loan amount. The break-even point is how long it takes for monthly savings to cover those costs:
Example: if refinancing costs $6,000 and saves you $200/month, your break-even is 30 months. If you plan to stay longer than that, it's likely worth it.
How much rate drop is worth it?
A common rule of thumb is to consider refinancing when you can drop your rate by 1% or more. But the real test is the break-even math, not a fixed threshold — a 0.5% drop on a large loan can still save thousands over time.
Compare old vs new
Use our free loan calculator twice: once with your current balance, rate, and remaining term, and once with the new rate and term. The difference in monthly payment is your potential savings. Then divide closing costs by that savings to find your break-even.