When to Refinance Your Mortgage: Rules, Math & Break-Even
Learn when refinancing saves money, how to calculate break-even, and common refinance mistakes to avoid.
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Key Takeaways
- 1Refinance when you can lower your rate by 0.75–1% or more.
- 2Calculate break-even: closing costs ÷ monthly savings = months to recoup.
- 3Extending your loan term can cost more total interest even with a lower rate.
- 4Cash-out refinances increase debt — use cautiously for home improvements only.
Refinancing replaces your current mortgage with a new one — ideally at a lower rate or better terms. Done right, it saves tens of thousands. Done wrong, it resets your clock and piles on closing costs.
Compare your current loan vs a new offer in our loan comparison calculator.
When Refinancing Makes Sense
Rate drop of 0.75–1%+ is the common threshold. On a $350,000 balance, dropping from 7% to 6% saves roughly $231/month.
Also consider refinancing to remove PMI once you have 20% equity, or to switch from ARM to fixed before rates rise.
Calculate Break-Even
If closing costs are $6,000 and monthly savings are $231, break-even is 26 months ($6,000 ÷ $231). Plan to stay in the home past break-even.
A lower payment from extending a 20-year loan to 30 years may not save total interest — run the full amortization.
Cash-Out Refinance Caution
Cash-out refinancing taps equity for cash at mortgage rates. Only use for value-adding home improvements or consolidating high-rate debt with a payoff plan.
Compare alternatives: HELOC vs home equity loan may be simpler for smaller amounts.
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