There is a rule of thumb that says refinance when you can drop your rate by one percentage point. It is wrong often enough to be dangerous, because it ignores the two variables that actually decide the question: what the refinance costs, and how long you are keeping it.
The calculation
Total closing costs, divided by monthly savings, equals your break-even in months.
Worked example. You owe $350,000 at 6.75% on a 30-year fixed, with a principal-and-interest payment of $2,270. You can refinance to 5.75%, dropping the payment to $2,043. That is $227 a month saved. Closing costs are $5,200.
$5,200 divided by $227 is 23 months. Stay past month 23 and the refinance made you money. Sell or refinance again before then and it cost you money, regardless of how much better the rate looked.
Two things that break the simple version
Term reset. If you are eight years into a 30-year loan and refinance into another 30-year, you have just added eight years of payments. The monthly savings are real, but total interest paid over the life of the loan may go up. Always ask for the new loan priced at your remaining term alongside the fresh 30-year, and compare both numbers.
Rolled-in costs. “No-cost” refinances are not free. Either the costs are added to your balance, or you accept a higher rate in exchange for a lender credit. Both are fine choices when you understand them. Neither makes the break-even calculation disappear, it just moves where the cost sits.
Four cases where a lower rate is not the point
- Dropping mortgage insurance. If your home appreciated past 20% equity, or you are carrying permanent FHA MIP, removing it can justify a refinance at the same rate or even slightly higher. Run the payment comparison including MI, not just the rate.
- Getting out of an ARM. Fixing your rate before an adjustment period is insurance, not arbitrage. Break-even is the wrong frame; the question is what the worst-case adjusted payment does to your budget.
- Shortening the term. Moving from 30 to 15 years usually raises the payment and saves six figures in interest. That is a savings decision, not a cash-flow one.
- Cash-out at a good rate. If you need capital, first-lien mortgage money is the cheapest borrowing most households can access. Compare it against a second mortgage or HELOC, though, because giving up a 3% first lien to access equity is almost never worth it.
When the answer is no
Sometimes it is, and you should expect to hear it. If you are moving in eighteen months and the break-even is thirty-one, the honest advice is to wait. Rates move; your break-even math does not care how motivated anyone is to close a loan this quarter.
Send us your current rate, balance, remaining term, and how long you plan to stay, and you will get the break-even math back in writing. Read more on refinance options, or start here.