The refinance decision in one number
Refinancing replaces your existing mortgage with a new one — usually to grab a lower rate and shrink your payment. But it isn't free: closing costs (often $3,000–$6,000) apply just like a new purchase. The question that decides everything is the break-even point: how many months of savings it takes to recover those costs. Break-even = closing costs ÷ monthly savings.
The rule of thumb
If you'll stay in the home well beyond the break-even point, refinancing usually makes sense. If you might move or sell before then, you'd pay the closing costs without recouping them — a losing trade. A refinance that saves $200/month with $5,000 of costs breaks even at 25 months; stay five years and you're roughly $7,000 ahead, but sell in 18 months and you've lost money.
Beyond the monthly payment
- Watch the term reset. Refinancing a 30-year loan you're 6 years into back to a fresh 30 years lowers the payment but can increase total interest by stretching the loan to 36 years overall. A lower rate helps; a longer term hurts.
- Shortening the term (e.g. 30→15 years) often barely changes — or raises — the payment while saving enormous interest and building equity faster.
- Cash-out refinancing lets you borrow against equity, but increases your balance and payment; treat it as taking on new debt, not "free money."
When to seriously consider it
The old guideline was to refinance when rates drop about 1% below your current rate, but the honest test is simply whether the break-even point comfortably fits inside how long you'll stay. Run your real numbers, confirm the closing costs, and make sure a lower payment isn't quietly costing you more interest over a longer term.