Should I refinance my mortgage? Do the break-even math first
When rates fall, everyone seems to be talking about whether to refinance your mortgage. A lower rate sounds like free money, but it isn't free: a refinance comes with closing costs, and those costs have to be earned back before you're actually ahead. The good news is that one short calculation tells you whether it's worth it.
How to calculate your mortgage refinance break-even point
Break-even (months) = total closing costs ÷ monthly savings
Say you owe $300,000 at 7.5% with 27 years left, paying about $2,162 a month. A lender offers 6.5% on a new loan with the same 27 years remaining. Your payment falls to roughly $1,967, saving about $196 a month. If closing costs are $6,000, you break even after about 31 months.
| Current loan | After refinancing | |
|---|---|---|
| Balance | $300,000 | $300,000 |
| Rate | 7.5% | 6.5% |
| Years remaining | 27 | 27 |
| Monthly payment | $2,162 | $1,967 |
| Interest still to pay | $400,553 | $337,199 |
Stay in the home more than about two and a half years and the refinance pays for itself. Stay the full term and you save over $63,000 in interest. Plan to move next year and it costs you money.
Is it worth refinancing for a 1% lower rate?
You'll often hear that refinancing only makes sense if you can cut your rate by a full percentage point. It's a reasonable rule of thumb, but it's a blunt one. On a large loan with modest fees, even half a point can pay off quickly. On a small loan with high fees, a full point might not. The break-even calculation answers the question for your loan, so use that instead.
| Rate cut | New rate | New payment | Saved per month | Break-even on $6,000 |
|---|---|---|---|---|
| 0.5 points | 7% | $2,063 | $99 | 61 months |
| 0.75 points | 6.75% | $2,015 | $147 | 41 months |
| 1 point | 6.5% | $1,967 | $196 | 31 months |
| 1.5 points | 6% | $1,872 | $290 | 21 months |
The hidden cost of refinancing into a new 30-year loan
Here's the trap. If you refinance the example above into a fresh 30-year loan instead of 27 years, the payment drops even further, to about $1,896. It feels like a bigger win. But you've just added three extra years of payments, and a chunk of the monthly "saving" is really just stretching the debt out.
A simple fix: take the new loan, but keep paying close to what you paid before. The extra goes straight to principal and keeps the real savings intact. The amortization calculator makes the difference easy to see.
| Option | Monthly payment | Time left | Interest still to pay |
|---|---|---|---|
| Keep current loan | $2,162 | 27 yr | $400,553 |
| Refinance, 27 years | $1,967 | 27 yr | $337,199 |
| Refinance, new 30 years | $1,896 | 30 yr | $382,633 |
| New 30 years, keep paying the old amount | $2,162 | 21 yr 6 mo | $257,361 |
Closing costs of $6,000 not included.
What does it cost to refinance a mortgage?
Expect many of the same costs as your original mortgage: lender and origination fees, an appraisal, title insurance, credit report and recording fees, and sometimes discount points if you're buying the rate down. Together they commonly run to a few percent of the loan. Always compare offers by APR as well as rate; our guide to APR vs. interest rate explains why.
| Cost | Typical range | Notes |
|---|---|---|
| Origination or lender fee | 0.5%–1% of the loan | Sometimes a flat fee instead |
| Appraisal | $400–$700 | May be waived for some refinances |
| Title search and insurance | $1,000–$2,500 | Varies widely by state |
| Credit report | $25–$75 | |
| Recording and government fees | $50–$250 | |
| Discount points (optional) | 1% of the loan per point | Buys a lower rate |
Ranges are general US examples; your loan estimate shows the real figures.
Does your credit score change the refinance rate?
Very much so. If your score has improved since you bought the house, you might qualify for a better rate even if market rates have barely moved. It's worth checking your credit report and paying down card balances a month or two before you apply. Our guide on improving your credit score walks through the steps.
Cash-out refinance: when does it make sense?
A cash-out refinance lets you borrow more than you owe and take the difference as cash. People use it for renovations that add value or to replace high-interest debt. Just be clear about what's happening: you're turning short-term debt into debt secured by your home and spread over decades. If the spending habits that created card debt haven't changed, the cards can fill back up while the house carries the old balance.
Is a no-closing-cost refinance really free?
Not quite. "No-closing-cost" usually means one of two things: either the costs are added to your new loan balance, or the lender covers them in exchange for a somewhat higher interest rate. Either way, you still pay; you just pay over time instead of on day one.
Here's what rolling the costs in looks like. Adding $6,000 of fees to the $300,000 balance in our example raises the new payment from about $1,967 to about $2,006, roughly $39 a month more for the rest of the loan. That can still make sense, especially if you might move within a few years and would never reach the break-even point on upfront costs. Just compare both versions side by side before deciding.
| Approach | Cash at closing | Monthly payment | Paid over 3 years | Paid over 10 years |
|---|---|---|---|---|
| Pay costs upfront | $6,000 | $1,967 | $76,800 | $242,000 |
| Roll costs into the loan | $0 | $2,006 | $72,216 | $240,720 |
| Higher rate (6.875%), lender pays | $0 | $2,039 | $73,406 | $244,687 |
Totals are cash out of pocket; they ignore differences in the remaining balance.
How long does a refinance take, and what will you need?
Many refinances close within 30 to 45 days, though it depends on the lender, the appraisal and how quickly you hand over paperwork. Expect to provide recent pay slips or other proof of income, tax returns, bank statements, details of your current mortgage, homeowners insurance information and identification. Self-employed borrowers usually need more.
If you're refinancing to catch a lower rate, ask how long the rate lock lasts and what happens if closing runs late. Having your documents ready before you apply is the easiest way to avoid a lock expiring at the wrong moment.
| Document | Why the lender asks |
|---|---|
| Recent pay slips or profit and loss | Proves current income |
| Two years of tax returns | Shows income is stable |
| Bank statements | Confirms savings and closing funds |
| Current mortgage statement | Shows the payoff amount |
| Homeowners insurance details | The new lender must be named on the policy |
| Photo ID | Identity check |
A quick checklist before you refinance your mortgage
- How long will you realistically stay in the home?
- What's the break-even point, using real quotes rather than advertised rates?
- Are you resetting the clock to 30 years, and if so, will you pay extra?
- Have you compared at least three lenders?
If the answers line up, refinancing can be one of the easiest ways to save thousands. If they don't, waiting costs you nothing.
Refinancing questions
How do I calculate my refinance break-even point?
Divide your total closing costs by how much you will save each month. The result is the number of months it takes to recover the costs.
How much does it cost to refinance?
Closing costs commonly total a few percent of the loan amount, depending on the lender and location.
Is refinancing worth it for half a percent?
It can be on a large loan with low fees. Calculate the break-even point rather than relying on a rule of thumb.
Does refinancing hurt my credit score?
There may be a small, temporary dip from the credit check and new account, which usually recovers.
How long does it take to refinance?
Many refinances close within 30 to 45 days, depending on the lender, the appraisal and how quickly you provide documents.