When to Refinance Your Mortgage (and When Not To)
Refinancing can save you money — or cost you money. The difference comes down to simple math that most people never run.
The Break-Even Calculation
Refinancing costs money upfront — typically 2-5% of the loan amount in closing costs. Divide that cost by your monthly savings to get your break-even point. If refinancing costs $6,000 and saves you $200/month, you break even in 30 months. If you plan to stay in the home longer than 30 months, the refinance makes sense. If not, you lose money.
When It Usually Makes Sense
Rates have dropped at least 0.75-1% below your current rate. You plan to stay in the home long enough to pass the break-even point. You want to switch from an adjustable-rate to a fixed-rate mortgage. You want to remove PMI by refinancing with 20% equity. You want to shorten your loan term (30-year to 15-year) to build equity faster.
When It Usually Does Not
You are close to paying off your mortgage — restarting the clock puts you back into interest-heavy payments. You plan to sell within a few years. The closing costs are high relative to the savings. You are extending your loan term just to lower the payment — this often costs more in total interest over the life of the loan.
Key Takeaways
- ✓Always calculate your break-even point before refinancing
- ✓A 0.75-1% rate drop is generally the minimum to make refinancing worthwhile
- ✓Extending your loan term lowers payments but usually costs more in total interest
- ✓Factor in how long you plan to stay in the home
Want a personalized plan?
HomeIQ Academy builds a learning path based on your situation — credit, income, savings — so you know what to focus on first.
Start Free