By the CalcLedger editorial team · Updated September 2026 · Examples use illustrative rates · How we calculate
"Rates dropped, should I refinance?" is one of the most common money questions homeowners ask, and the old rule of thumb — refinance if you can cut your rate by 1% — is too blunt to be useful. Whether a refinance pays off depends on three numbers: how much it costs, how much it saves each month, and how long you'll keep the new loan.
The break-even formula
A refinance is a trade: you pay closing costs now in exchange for a lower payment later. The break-even point tells you how long it takes for the savings to repay the costs:
If you'll stay in the home — and keep the loan — longer than the break-even period, the refinance puts money in your pocket. If you might sell or refinance again before then, it probably loses money.
Closing costs on a refinance typically run about 2% to 6% of the loan amount: lender origination fees, appraisal, title insurance, recording fees, and any discount points you buy. Get a Loan Estimate from each lender — it's a standardized three-page form that makes these costs easy to compare side by side.
Worked example
Suppose you owe $300,000 at 7.0% with 27 years left. Your principal-and-interest payment is about $2,063 a month. A lender offers a new 30-year loan at 6.0% with $9,000 in closing costs (3% of the loan).
- New payment: about $1,799 a month.
- Monthly savings: $2,063 − $1,799 = $265.
- Break-even: $9,000 ÷ $265 ≈ 34 months, just under three years.
If you expect to stay at least three more years, the refinance clears its costs. Stay ten years and the payment savings add up to roughly $31,000 against $9,000 in costs.
The term-reset trap
Here's what the monthly-payment comparison hides. In the example, you had 27 years left, and the new loan starts a fresh 30-year clock. Part of the "savings" comes from stretching the debt over three extra years, not from the lower rate.
Compare the total interest you'd pay from here on:
| Option | Monthly P&I | Monthly savings | Break-even | Remaining interest |
|---|---|---|---|---|
| Keep 7.0% loan (27 yrs left) | $2,063 | — | — | $368,556 |
| Refi to 6.0%, 30 years | $1,799 | $265 | 34 months | $347,515 |
| Refi to 6.0%, 27 years | $1,872 | $191 | 47 months | $306,514 |
| Refi to 6.0%, 25 years | $1,933 | $131 | 69 months | $279,871 |
The 30-year refinance has the best monthly number, but matching your remaining 27 years saves about $41,000 more in interest. If your lender only offers standard terms, you can get the same effect by taking the 30-year loan and paying the old amount each month — the extra goes straight to principal.
Remaining interest: keep your loan or refinance?
$300,000 balance; current loan 7.0% with 27 years left; refinance at 6.0%
Should you pay points?
Lenders will often let you buy a lower rate with discount points. One point costs 1% of the loan and usually lowers the rate by a fraction of a percent. Points follow the same break-even logic. On the $300,000 example, if one point ($3,000) lowers the rate from 6.0% to 5.75%, the payment falls from about $1,799 to $1,751. That's $48 a month, so the point takes about 63 months, over five years, to pay for itself. Points usually make sense only if you're confident you'll keep the loan long term and won't refinance again if rates drop.
When refinancing usually makes sense
- You can lower your rate meaningfully and will stay past the break-even point.
- You want to drop mortgage insurance. If your home has gained value and you now have 20% or more equity, a conventional refinance can eliminate PMI — or the lifetime mortgage insurance premium on many FHA loans. See our PMI guide.
- You want out of an adjustable rate before it resets higher.
- You want a shorter term. Moving from 30 to 15 years raises the payment but can cut total interest dramatically. Our 15- vs. 30-year comparison shows the numbers.
When it usually doesn't
- You're likely to move within a few years. You'll pay the full closing costs and collect only part of the savings.
- You're far into your current loan. Fifteen years into a 30-year mortgage, most of each payment already goes to principal. Restarting a long loan pushes you back toward interest-heavy payments. Our amortization guide explains why.
- "No-closing-cost" offers. They usually aren't free. The lender either charges a higher rate or adds the costs to your balance. Sometimes that's still worth it for a short stay, but compare the rate you'd get with costs paid up front.
Cash-out refinancing is a different decision
A cash-out refinance replaces your mortgage with a larger one and hands you the difference. If your current rate is low, you give up that rate on the entire balance, not just the new cash. For many homeowners with older, cheaper mortgages, a home equity loan or HELOC is the less expensive way to borrow. We compare all three in HELOC vs. home equity loan vs. cash-out refinance.
Check your own break-even
The quickest way is the refinance calculator, which shows your savings, break-even point, and lifetime interest together. To do it by hand, enter your current balance, rate, and remaining term in the loan calculator to get today's payment, then enter the new rate and term to get the new one. Divide the lender's closing costs by the difference. Then compare total interest. The payment tells you what the refinance feels like each month. The total interest tells you whether it actually saved you money.