Refinance Guide
When does refinancing actually make sense?
The answer isn't "when rates drop 1%." That rule of thumb has cost homeowners billions. Here's the real math.
What refinancing actually does
Refinancing replaces your existing mortgage with a new one — ideally at a lower interest rate, different term, or both. You pay off your old loan and start fresh. The catch: starting fresh has an upfront cost (closing costs), and that cost has to be worth paying.
There are two main types of refinance:
- Rate-and-term refi: Changes your interest rate, loan term, or both. The goal is a lower payment or less total interest paid.
- Cash-out refi: Replaces your mortgage with a larger one and gives you the difference in cash. A different decision with different math — this guide focuses on rate-and-term.
The break-even calculation
The single most important number in any refinance decision is the break-even month — the point at which your cumulative monthly savings finally exceed what you paid in closing costs.
Break-even formula:
Closing costs ÷ Monthly payment savings = Break-even month
Example: $8,000 closing costs ÷ $210/month savings = 38 months to break even
If you plan to stay in your home past month 38 in the example above, you benefit from the refi. If you sell or move before then, you paid closing costs for nothing.
This is why "will rates go down?" is the wrong question. The right question is: "Will I stay long enough to break even?"
How much of a rate drop do you actually need?
The "1% rule" (only refi if you can drop your rate by 1%) is a heuristic invented by lenders, not mathematicians. The actual threshold depends entirely on your loan balance and closing costs.
| Loan balance | Rate drop | Monthly savings | $8,000 closing costs break-even |
|---|---|---|---|
| $150,000 | 1.0% | ~$83/mo | Month 97 — nearly 8 years |
| $350,000 | 0.5% | ~$106/mo | Month 75 |
| $350,000 | 1.0% | ~$210/mo | Month 38 |
| $600,000 | 0.5% | ~$181/mo | Month 44 |
| $600,000 | 0.75% | ~$271/mo | Month 30 |
A 0.5% drop on a $600,000 balance has a shorter break-even than a 1.0% drop on a $150,000 balance — even with identical closing costs. Balance matters as much as rate.
The term tradeoff: shorter vs. longer
Refinancing into a new 30-year term when you have 22 years left extends your payoff date by 8 years. You'll have a lower payment but pay significantly more total interest over the life of the loan.
Compare these scenarios on a $350,000 refi from 7.25% to 6.50%:
| New term | Monthly payment | Total interest | vs. keeping current loan |
|---|---|---|---|
| 30-year | $2,212 | $446,432 | Pay more total (extended term) |
| 20-year | $2,624 | $279,760 | Save ~$87,000 interest |
| 15-year | $3,051 | $199,180 | Save ~$165,000 interest |
The 15-year is harder to afford monthly but the interest savings are dramatic. The calculator lets you compare all scenarios side by side.
When not to refinance
- You're planning to sell or move within 2–3 years (won't clear break-even)
- You're far into your current loan — most of your payments are now principal, not interest
- Your credit score has dropped significantly since your original mortgage
- The closing costs are being rolled into the loan (you pay interest on them forever)
- Your lender is pushing you to refinance repeatedly — "churn" benefits them, not you
Refinance readiness checklist
- Run the break-even calculator — confirm you'll stay past break-even
- Get a Loan Estimate from at least 3 lenders — it's federally required and free
- Compare APR, not just rate — APR includes fees and is a truer cost comparison
- Ask each lender for the same loan scenario (same term, no points) for a fair comparison
- Check if your current lender offers a "streamline" refi — sometimes cheaper
- Factor in your current amortization stage — restarting resets your interest-to-principal ratio
Run your own numbers
The calculator handles all of this math for your specific situation — loan balance, closing costs, how long you'll stay, and whether the rate drop is big enough to matter.
Open the calculator →