See whether refinancing your mortgage is worth it: compare your current and new monthly payments, total interest and the break-even point where the savings cover your closing costs.
When does refinancing make sense?
Refinancing replaces your current mortgage with a new one. It can pay off when:
- Rates have dropped enough to lower your payment meaningfully.
- You want to switch from an adjustable rate to a fixed rate.
- You want a shorter term to save interest, or a longer term to lower the payment.
- Your home value has risen and refinancing would remove PMI.
The key question is whether the savings outweigh the costs, and how quickly.
The break-even point
Break-even (months) = Closing costs ÷ monthly savings
If you plan to stay in the home longer than the break-even point, refinancing will likely save money. If you might move before then, the fees may outweigh the savings.
Worked example
You owe $250,000 at 7.5% with 27 years left, so your principal and interest payment is about $1,801.83. You can refinance into a new 30-year loan at 6.0% with $5,000 in closing costs.
- New payment: $1,498.88, saving $302.96 a month.
- Break-even: $5,000 ÷ $302.96 = about 16.5 months, so 17 months in practice.
- Total interest falls from about $333,794 to $289,595, even though the new loan runs three years longer.
Choosing a 25-year term instead keeps the payment at $1,610.75, still about $191 lower, and cuts total interest to about $233,226.
Watch out for the "reset" effect
Starting a new 30-year loan when you only had 20 years left can lower your payment but add years of interest. Compare the total interest as well as the monthly payment, or choose a term close to the years you have left.
Frequently asked questions
How much do rates need to drop to refinance?
There is no fixed rule. A smaller rate drop can still be worth it on a large balance with low closing costs. Use the break-even point rather than a rule of thumb.
Can I roll closing costs into the new loan?
Often yes, but then you pay interest on them. Include them in the balance to see the effect.
Does refinancing hurt my credit?
A refinance involves a credit check, which may lower your score slightly for a short time. Shopping several lenders within a short window is usually treated as a single inquiry for mortgages.
Related tools
Results are estimates for planning and education only. They are not financial, tax, legal or medical advice. Check important numbers with a qualified professional.