When to Refinance Your Mortgage - Break-Even Calculator

Refinancing makes sense when you can lower your rate by at least 0.5-0.75% and you’ll stay in your home long enough to recoup closing costs. Calculate your break-even point by dividing total closing costs by monthly savings. If closing costs are $5,000 and you save $150/month, break-even is 33 months. Stay longer than that and refinancing saves you money.

When Does Refinancing Make Sense?

The Rate Drop Rule

Traditional guidance says refinance when you can drop your rate by 1% or more. But with today’s higher rates, even 0.5-0.75% can make sense if:

You’re staying long-term
Closing costs are reasonable
You’re not restarting a 30-year clock unnecessarily

Calculate Your Break-Even Point

Break-even formula:

Break-even months = Closing costs ÷ Monthly savings

Example:

Current payment: $2,450 (6.75% rate)
New payment: $2,280 (6.0% rate)
Monthly savings: $170
Closing costs: $5,500
Break-even: $5,500 ÷ $170 = 32 months

If you’ll stay more than 32 months (2.7 years), refinancing pays off.

Real Refinance Scenarios

Scenario 1: Clear winner

Rate drop: 7.5% → 6.25%
Loan: $350,000
Monthly savings: $285
Closing costs: $4,800
Break-even: 17 months

Scenario 2: Marginal case

Rate drop: 6.75% → 6.5%
Loan: $280,000
Monthly savings: $46
Closing costs: $5,200
Break-even: 113 months (9.4 years)

Scenario 3: Term change

30-year at 6.5% → 15-year at 5.75%
Payment increase: $2,212 → $2,912
Interest savings: $272,000 over life of loan

Types of Refinance

Rate-and-Term Refinance

Replace your current loan with a new loan at better rate or different term. No cash out.

Best for:

Lowering your interest rate
Switching from ARM to fixed
Shortening your term (30 → 15 years)
Removing PMI by reaching 20% equity

Requirements:

Standard credit and income qualification
Typically need 5%+ equity
Appraisal usually required

Cash-Out Refinance

Replace your loan with a larger one and pocket the difference in cash.

Best for:

Home improvements
Debt consolidation
Major expenses
Investment opportunities

Requirements:

Usually need 20%+ equity (keep 80% LTV)
Higher rates than rate-and-term (typically 0.125-0.5% more)
Full income and asset documentation

simplify Refinance

Simplified refinance with reduced documentation for existing government loans.

FHA simplify:

Must already have FHA loan
No appraisal required
No income verification
Must show “net tangible benefit” (lower payment)

VA IRRRL (Interest Rate Reduction Refinance Loan):

Must already have VA loan
No appraisal required
No income verification
Can include closing costs in new loan

USDA simplify:

Must already have USDA loan
Two options: with or without appraisal
Must reduce payment

Best Times to Refinance

When Rates Drop Significantly

The most common trigger. If rates fall 0.5-1% below your current rate, run the numbers.

Marcus locked his loan at 7.25% in 2023. When rates dropped to 6.25% in 2024, he refinanced, saving $210/month on his $320,000 balance.

When Your Credit Has Improved

A higher credit score means a better rate. If your score has jumped 50+ points, you might qualify for significantly better terms.

Score improvement impact:

660 → 720: ~0.5% rate reduction
680 → 760: ~0.375% rate reduction

When You Want to Change Loan Terms

30-year to 15-year: Higher payment but massive interest savings and faster payoff.

ARM to fixed: Lock in stability before your adjustable rate increases.

Remove PMI: If home value increased and you’re now at 20% equity, refinancing eliminates PMI.

When You Need Cash

Cash-out refinancing can be cheaper than:

Home equity loans
Personal loans
Credit cards

If you need $50,000+ and have significant equity, cash-out might be your best option.

When You’re Paying Too Much PMI

PMI rates vary by credit score and LTV. If your credit improved or home value increased, refinancing might lower or eliminate PMI.

When NOT to Refinance

You’re Moving Soon

If you’ll sell before break-even, refinancing costs you money.

Don’t refinance if:

You might move within 2-3 years
Job transfer is possible
Life changes (divorce, retirement) might force a sale

You’re Far Into Your Loan

Late in a mortgage, most payment goes to principal. Refinancing restarts the clock.

Example: 20 years into a 30-year mortgage

Current payment: 70% principal, 30% interest
After refinancing to new 30-year: 15% principal, 85% interest

You’d pay mostly interest again. Consider a 10-15 year term instead.

The Costs Don’t Justify Savings

Always run break-even calculation. Some refinances look attractive but don’t pencil out.

Red flags:

Break-even over 5 years
Rate drop under 0.5%
High closing costs relative to savings

You’ll Lose Good Loan Features

Some loans have features worth keeping:

Assumable loans (let buyer take over your low rate)
No-PMI loans that are hard to replicate
Special program benefits (down payment assistance forgiveness)

Refinance Closing Costs

Typical Costs

Fee	Amount
Origination fee	0.5-1% of loan
Appraisal	$400-$700
Title search	$200-$400
Title insurance	$500-$1,500
Recording fees	$50-$250
Credit report	$30-$50
Flood certification	$15-$25
Total	2-3% of loan

On a $300,000 refinance: $6,000-$9,000 typical.

Reducing Closing Costs

Shop multiple lenders: Closing costs vary significantly.

Negotiate: Ask lenders to waive or reduce fees.

No-closing-cost option: Accept higher rate in exchange for lender paying costs.

Lender credits: Points in reverse—higher rate for closing cost credit.

No-Closing-Cost Refinance

Lender covers closing costs in exchange for higher rate.

Example:

Standard: 6.25% rate, $6,000 closing costs
No-cost: 6.625% rate, $0 closing costs

When it makes sense:

You’re uncertain how long you’ll stay
You don’t want to pay out of pocket
Rate is still better than current loan

When to avoid:

You’re staying long-term (higher rate costs more than closing costs saved)
You can easily afford closing costs

The Refinance Process

Step 1: Calculate Break-Even

Before contacting lenders, know if refinancing makes sense for your situation.

Step 2: Check Your Credit

Pull your credit reports and scores. Address any errors. Pay down credit cards if possible.

Step 3: Get Multiple Quotes

Apply with 3-5 lenders within a 14-day window. All inquiries count as one for credit scoring.

Step 4: Compare Offers

Look at:

Interest rate
APR (includes fees)
Closing costs itemized
Monthly payment
Total cost over expected time in home

Step 5: Lock Your Rate

Once you choose a lender, lock your rate. Get the lock in writing with expiration date.

Step 6: Submit Documentation

Similar to original purchase:

Pay stubs (30 days)
Tax returns (2 years)
W-2s (2 years)
Bank statements (2 months)

Step 7: Appraisal

Lender orders appraisal to confirm home value supports the loan.

Step 8: Underwriting and Closing

Underwriter reviews file, clears conditions and you close. Typically 30-45 days from application.

Refinance Tax Implications

Points Deduction

Points paid on a refinance must be deducted over the life of the loan, not in the year paid (unlike purchase).

Example: $3,000 in points on 30-year refinance = $100/year deduction for 30 years

Mortgage Interest Deduction

Interest remains deductible on debt up to $750,000 used to “buy, build or substantially improve” your home.

Cash-out caution: If you use cash-out proceeds for non-home purposes (debt consolidation, car, vacation), that portion of interest isn’t deductible.

Consult a Tax Professional

Tax implications can be complex. Get professional advice for your specific situation.

Frequently Asked Questions

How much does it cost to refinance?

Typically 2-3% of the loan amount. On a $300,000 loan, expect $6,000-$9,000 in closing costs. Some costs can be negotiated or offset with lender credits.

How long does refinancing take?

Usually 30-45 days from application to closing. Simplify refinances may be faster. Complex situations or appraisal issues can extend the timeline.

Can I refinance with bad credit?

Yes, but options are limited. FHA refinance requires minimum 580. Some lenders work with lower scores at higher rates. Improving your credit first usually saves money.

How many times can you refinance?

There’s no legal limit. However, each refinance has costs. Most lenders require you to wait 6 months between refinances (seasoning period).

Does refinancing hurt your credit?

Temporarily, yes. The hard inquiry and new account may drop your score 5-15 points. The impact fades within a few months. Long-term, keeping the mortgage in good standing helps your credit.

Should I refinance to a 15-year mortgage?

If you can afford the higher payment, yes. You’ll pay significantly less interest and build equity faster. But don’t refinance to 15 years if the payment strains your budget.

Is it worth refinancing for 0.5%?

Maybe. Run the break-even calculation. On a $300,000 loan, 0.5% saves about $100/month. With $5,000 closing costs, break-even is 50 months. If you’re staying 5+ years, it’s worthwhile.

Calculate Your Refinance Break-Even Point Before You Apply