Refinancing replaces your current mortgage with a new one — usually to get a lower interest rate, change the loan term, or access home equity. It is not free. Closing costs typically run $3,000–$6,000, and you need to stay in the home long enough after refinancing to recoup those costs through your monthly savings.
The Break-Even Calculation
Break-even months = closing costs ÷ monthly savings. If refinancing costs $5,000 in closing fees and saves you $200/month, your break-even is 25 months. If you plan to sell or move within 25 months, refinancing costs you money.
The 1% Rule of Thumb
A popular shortcut: refinancing is generally worth it if you can reduce your interest rate by at least 1 percentage point. This is a rough guideline — the actual answer depends on your loan balance, closing costs, and how long you plan to stay. On a large loan ($500k+), even 0.5% can be worth it. On a small balance ($100k), 1% might barely cover closing costs.
Types of Refinancing
- •Rate-and-term refinance: lowers your rate and/or changes the term. Most common.
- •Cash-out refinance: borrow more than you owe and receive the difference in cash. Useful for home improvements, but resets your loan balance.
- •Streamline refinance (FHA/VA): simplified process with less documentation. Only for existing FHA or VA loans.
- •No-closing-cost refinance: closing costs rolled into the loan rate. Higher rate, but no upfront cash needed.
Avoid refinancing in the last 10 years of a 30-year mortgage. By that point you've already paid most of the interest. Refinancing into a new 30-year loan resets the amortization clock and front-loads interest all over again.
When Refinancing Makes No Sense
- •You plan to move within 2–3 years (break-even likely not reached)
- •You are more than halfway through a 30-year loan
- •The new rate is less than 0.5% lower than your current rate (savings may not cover costs)
- •You have a prepayment penalty on your current loan
- •Your credit score has dropped significantly since your original mortgage
How to Get the Best Refinance Rate
- 1.Shop at least 3–5 lenders. Rates can vary by 0.5% or more for the same borrower.
- 2.Get quotes within a 14-day window — multiple credit pulls in this window count as a single inquiry for FICO purposes.
- 3.Improve your credit score before applying if possible. Even 20 points can save 0.25–0.375%.
- 4.Consider paying points (prepaid interest) if you plan to stay long-term — 1 point = 1% of loan = typically 0.25% rate reduction.
- 5.Compare the APR (not just the interest rate) — APR includes fees and gives a true cost comparison.
Frequently Asked Questions
When does it make sense to refinance a mortgage?
Refinancing typically makes sense when you can lower your rate by at least 0.5–1 percentage point, plan to stay in the home past the break-even point, and closing costs are reasonable (2–5% of loan amount). It also makes sense to switch from an ARM to a fixed-rate loan for payment stability, or to shorten your term if cash flow allows.
Calculate your refinance savings →How much does it cost to refinance?
Refinance closing costs typically run 2–5% of the loan amount — on a $300,000 loan, expect $6,000–$15,000 in fees (origination, appraisal, title insurance, etc.). Some lenders offer 'no-closing-cost' refis that roll fees into the rate or loan balance, which costs more over time but reduces upfront cash needed.
What's the break-even point on a refinance?
Break-even = closing costs ÷ monthly savings. If you pay $8,000 in closing costs and save $250/month, your break-even is 32 months (about 2.7 years). If you sell or refinance again before that, you lose money. Plan to stay past break-even by at least a few years to make refinancing worthwhile.
Find your break-even point →Can I refinance more than once?
Yes — there's no legal limit to how many times you can refinance, but each refi restarts the clock on your amortization (more interest-heavy early payments) and costs closing fees. Serial refinancers must recalculate the break-even each time. Some lenders require you wait 6 months between refis on the same property.
How does my credit score affect refinance rates?
Credit score is the biggest rate determinant after the loan amount. Scores above 760 typically get the best rates; below 620 makes refinancing very expensive or impossible. A 100-point difference in score on a $300,000 refi can mean 0.5–1% higher rate, costing $30,000–$60,000 extra over 30 years.