Start with your goal
People refinance for different reasons: a lower payment, paying off the house sooner, swapping an adjustable rate for a fixed one, dropping mortgage insurance or pulling out cash. A deal can be great for one goal and poor for another, so name yours first.
Whatever the goal, the test is the same. Does the new loan leave you better off by the date you expect to sell, pay off or refinance again?
The break-even rule of thumb
Divide your closing costs by the monthly payment savings. If you owe $280,000 at 7% with 25 years left and refinance to 6.25%, the payment drops by $254.97. With $4,500 of costs, you're even after about 17.6 months.
If you'll stay well past that, refinancing starts to look sensible. If you might move sooner, it probably won't pay off.
Formula notes
Break-even months = closing costs / monthly savings
Why the simple rule can mislead
That example used a fresh 30-year loan to replace one with 25 years left. Part of the lower payment comes from stretching the debt, not from the better rate. After five years you'd owe about $6,090 more on the new loan than on the old one.
Count the balance too and break-even moves to month 28. Keep the new loan for the full 30 years and you pay $31,448.41 more than if you'd stayed put. A lower payment and lower total cost aren't the same thing.
Match the term to what you have left
Take the same rate and costs on a 25-year loan instead, matching your remaining term. The payment is $1,847.07, so only $131.91 less per month. But you'd save $35,072.25 over the life of the loan, and the balance-adjusted break-even arrives sooner, at month 26.
If you can handle a higher payment, a 15-year refinance at the same rate would be $2,400.78 a month and save $157,053.40 in total. It's the opposite of payment relief, but it's the fastest route to owning the house.
Traps that erase the savings
These are the most common ways a good-looking refinance ends up costing money.
- Moving early. In the 30-year example, selling after two years leaves you $484.14 behind.
- Buying points you won't keep long enough to recover.
- Rolling costs into the loan and calling it free. In the example, that pushes break-even to month 32.
- Taking cash out at a higher rate than your current mortgage, which reprices the whole balance.
- Comparing an offer's rate against another offer's fees. Use one Loan Estimate per scenario.
Run your own test
Our refinance calculator runs both break-even measures, lets you set how long you'll keep the loan and shows each year's balances side by side. Try your expected holding period, then a shorter one. If the refinance only wins in the long case, ask yourself how sure you are that you'll stay.
Before you lock, get Loan Estimates from more than one lender on the same day and for the same loan type. Put each one through the same test, and pick the offer that wins over the time you expect to keep it.
Frequently asked questions
How much should rates drop before I refinance?
There's no fixed number. What matters is whether the savings recover your costs before you move. A drop of 0.75 percentage points recovered $4,500 of costs in about 17.6 months in our example.
Does it make sense to refinance if I'm moving in two years?
Usually not. In the example, a refinance with $4,500 of costs was still $484.14 behind after two years once balances were counted.
Is refinancing to a 15-year mortgage a good idea?
It saves the most interest but raises the payment. Make sure the higher payment leaves room for savings and emergencies before you commit.
Can refinancing get rid of PMI?
It can, if your home's value has risen enough that the new loan doesn't need mortgage insurance. Enter both insurance amounts to see the effect on your monthly cost.
What costs should I compare between refinance offers?
Compare the rate, points, lender credits, lender fees and third-party loan costs from each Loan Estimate. Keep prepaids and escrow deposits separate, since they aren't charges for the loan itself.
References
These sources support the method or guidance used for Refinance Calculator. Verify time-sensitive rules at the source.
Try the calculator
Open Refinance Calculator, enter your scenario, and compare its supporting rows with this guide's method and checks.