When to Refinance Your Mortgage (The Break-Even Math)
Refinancing sounds great until you realize it costs $3,000-6,000 upfront. Here is when the math actually works.
Refinancing replaces your current mortgage with a new one at a lower rate. But the closing costs ($3,000-6,000) mean you need to stay long enough to recoup them. This is the break-even calculation most people skip.
The Break-Even Formula
Monthly savings = old payment - new payment. Break-even months = closing costs / monthly savings. If you plan to stay longer than the break-even: refinance. If not: do not bother.
Example
$300,000 mortgage, dropping from 7.5% to 6.5%. Old payment: $2,098. New payment: $1,896. Monthly savings: $202. Closing costs: $4,500. Break-even: 22 months. If you are staying 2+ more years, refinancing saves you $20,000+ over the remaining loan term.
When NOT to Refinance
Rate difference under 0.5%. Planning to move within 2 years. Already 20+ years into a 30-year mortgage (you are mostly paying principal now). Adding years to your loan (restarting the clock).
Run your specific numbers with our refinance break-even calculator and EMI calculator.