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.