When Should You Refinance Your Mortgage?

Refinancing can save you thousands — or cost you money if the timing is wrong. Here’s how to know if refinancing makes sense for your situation.

The Simple Rule

Refinancing is generally worth it when you can lower your rate by at least 0.5-0.75% and you plan to stay in the home long enough to recoup closing costs.

How to Calculate Your Break-Even Point

Refinancing has closing costs, typically 2-3% of the loan amount. Divide the closing costs by your monthly savings to find your break-even point.

Example: $300,000 loan, refinancing from 7.5% to 6.5%

Current Refinanced
Interest rate 7.5% 6.5%
Monthly P&I $2,098 $1,896
Monthly savings — $202
Closing costs — $7,500
Break-even — 37 months

If you plan to stay in the home for at least 37 more months, the refinance saves you money. After the break-even point, you’re saving $202 every month.

5 Good Reasons to Refinance

1. Lower Your Interest Rate

The most common reason. Even a 0.5% reduction on a $300,000 loan saves about $100/month and $36,000 over 30 years.

2. Remove PMI

If your home has appreciated and you now have 20%+ equity, refinancing to a conventional loan eliminates PMI. This can save $150-$300/month.

3. Switch From ARM to Fixed Rate

If you have an adjustable-rate mortgage and rates are reasonable, locking in a fixed rate protects you from future rate increases.

4. Shorten Your Loan Term

Refinancing from a 30-year to a 15-year mortgage when rates are low can save hundreds of thousands in interest, even if your monthly payment increases.

On a $300,000 loan:

  • 30-year at 6.5%: $1,896/month, $382,633 total interest
  • 15-year at 6.0%: $2,532/month, $155,683 total interest
  • Savings: $226,950 in interest

5. Cash-Out for Home Improvements

A cash-out refinance lets you borrow against your equity for renovations that increase your home’s value. This can make sense if the improvements add more value than the refinancing costs.

When NOT to Refinance

  • You’re moving soon — If you’ll sell before reaching the break-even point, you’ll lose money
  • Your credit has dropped — A lower credit score means a higher rate, potentially negating any benefit
  • You’re extending your term — Restarting a 30-year clock when you have 20 years left means more total interest, even at a lower rate
  • The closing costs are too high — Always compare the total cost, not just the monthly payment
  • You’re close to paying off your mortgage — In the final years, most of your payment goes to principal anyway

Rate-and-Term vs. Cash-Out Refinance

Type What It Does Typical Rate
Rate-and-term Changes your rate and/or term, no cash out Lower rate
Cash-out Replaces your mortgage with a larger one, you keep the difference 0.25-0.5% higher rate

Cash-out refinances have slightly higher rates because the lender takes on more risk with a larger loan.

The Refinancing Process

  1. Check your current rate and balance — Know your starting point
  2. Get quotes from 3-5 lenders — Compare rates, closing costs, and terms
  3. Calculate your break-even point — Make sure the math works
  4. Lock your rate — Rate locks typically last 30-60 days
  5. Close on the new loan — Similar process to your original mortgage, but usually faster

Calculate Your Refinance Savings

Use our PITI calculator to compare your current payment with a new rate. Enter your remaining loan balance, new interest rate, and desired term to see your potential savings.

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