When to Refinance Your Mortgage (and When Not To)

The bad heuristic

You'll hear: "Refinance when rates drop 0.5% (or 1%) below your current rate."

This rule is incomplete. A 1% rate drop saves you nothing if you sell the house 18 months later and the closing costs were $8,000.

The correct test

Refinance only when both are true:

The new payment is meaningfully lower than the current payment.
You will stay in the home (or keep the loan) longer than the break-even period.

The Refinance Break-Even calculator computes #2 for you. Punch in your numbers and get a specific month count.

Typical break-even ranges

Streamlined refi (low closing costs ~$3K): 18-24 months
Standard refi ($5-8K): 30-48 months
Cash-out refi ($8-15K): 60+ months

If your break-even is 48 months and you're 80% likely to sell in 36 months, skip it. The refi is a guaranteed loss.

Other reasons to refinance besides rate

Drop PMI — if your home appreciated past 80% LTV, refi-ing eliminates PMI even at a higher rate (see our PMI guide).
Shorten term — refinance 30-year to 15-year locks in a lower rate AND saves enormous interest.
Switch ARM to fixed — if rates are dropping but your ARM resets up, lock in fixed before the next adjustment.
Cash-out for value-add — borrow against equity for high-ROI improvements (kitchen, bathroom). Skip for vacations.

Reasons NOT to refinance

You're moving in less than 3-5 years.
The new closing costs eat more than 5 years of monthly savings.
You'd reset a 25-year-into-30 loan back to 30 years (you'd pay more interest overall, even at a lower rate).
Your credit recently dropped and you'll get worse terms than expected.
The lender is pushing a "no-cost" refi where the costs are baked into a higher rate.

The hidden cost: term reset

If you're 8 years into a 30-year mortgage and you refi to a new 30-year, you've added 8 years of interest payments — even if the monthly is lower. Always:

Refi to a shorter term (15 or 20 year), OR
Refi to a new 30 but keep paying the OLD monthly amount (extra goes to principal).

Otherwise you're trading short-term cash flow for long-term cost.

The math example

Current loan: $300K at 7.5%, 28 years remaining. Monthly: $2,113. Refi to: $306K (including $6K closing) at 6%, 30 years. Monthly: $1,834.

Monthly savings: $279
Break-even: $6,000 / $279 = 21.5 months

If you'll stay 5+ years, the refi pays off. If you'll sell in 18 months, you lose $700.

Bottom line

Always run the break-even calculation. The rate drop matters; how long you'll stay matters more.

The break-even, worked

You owe $350,000 with 28 years left at 7.2%. You can refinance at 6.2%. Closing costs are $6,500.

	Current	New 30-year	New 28-year
Monthly payment	$2,424.92	$2,143.64	$2,197.28
Monthly saving	—	$281.28	$227.64
Break-even	—	23 months	29 months
Remaining interest	$464,773	$421,711	$388,286

Two things there deserve attention.

The 30-year refinance looks better on every metric a lender will show you — bigger monthly saving, faster break-even. It is also the more expensive option by $33,425 in total interest, because you have just restarted a 28-year loan at 30 years.

The 28-year refinance saves less per month and takes longer to break even, yet it is the cheaper loan. Matching the remaining term is how you capture a rate drop without paying for it in added years.

Neither is automatically right. If cash flow is tight, the extra $53 a month is real money today. Just make the trade knowingly, rather than because it was the option on the quote sheet.

The break-even rule most people get wrong

The common version is: refinance if you will stay past break-even. Right idea, wrong horizon. What matters is whether you keep this mortgage past break-even — and mortgages end for reasons besides moving:

You refinance again when rates fall further, restarting the clock.
You sell earlier than planned.
You pay it off from a windfall or a downsize.

If any of those look likely inside two years, the closing costs are unlikely to be recovered.

No-cost refinances are not free

Lenders will absorb closing costs in exchange for a higher rate, typically 0.25 to 0.5 percentage points. Nothing dishonest about it, and it is genuinely the better choice on a short horizon: no upfront cost means no break-even to clear.

Over a long horizon it is far more expensive. On a $350,000 balance, a 0.375-point rate increase costs roughly $1,300 a year, every year, to avoid a one-time $6,500. Past five years you have paid more than the costs you avoided — and you keep paying.

Short horizon means take the no-cost option. Long horizon means pay the costs.

Rate-and-term versus cash-out

Different products, different pricing, different risk.

Rate-and-term replaces the balance and nothing more. It prices best, and it is the version the math above applies to.

Cash-out increases the balance to put money in your pocket. Lenders price it 0.25 to 0.5 points higher because the loan is riskier at a higher loan-to-value. Critically, you reprice your entire mortgage to access a fraction of it. If your existing rate is below the refinance rate, that is almost always the wrong trade — a HELOC leaves the first mortgage alone. See HELOC vs cash-out refinance.

When not to refinance, whatever the rate

You are deep into an existing loan. Amortisation is front-loaded with interest; restarting at year 22 of a 30-year loan means paying interest-heavy early payments all over again, even at a lower rate.
Your credit has deteriorated. The rate you are quoted may not survive underwriting.
Removing PMI is the only goal. Check first whether you can simply request cancellation at 80% loan-to-value — that costs an appraisal, not a refinance.
The saving is under $100/month on a large balance. The improvement is probably too small to survive closing costs.

Run your actual quote through the refinance break-even calculator, and ask specifically for a same-term option so you can see both columns.