Should You Refinance? Calculate the Break-Even Point
Calculate how many months until refinancing pays for itself. Compare your current vs new mortgage terms.
The Break-Even Calculation
Refinance break-even = Closing Costs ÷ Monthly Savings. If refinancing costs $6,000 and saves $200/month, break-even is 30 months (2.5 years). If you plan to stay in the home longer than the break-even period, refinancing makes financial sense. If you might sell before break-even, the closing costs are wasted.
When to Refinance
The old rule was "refinance when rates drop 1%+." With modern lower closing costs, even a 0.5-0.75% rate reduction can make sense if you plan to stay 3+ years. Also consider: switching from adjustable to fixed rate (certainty), shortening the term (15-year saves enormous interest), or removing PMI (once you have 20% equity). Cash-out refinancing has different math — you are borrowing more, not just changing terms.
A frequently overlooked refinance strategy: keep making your old (higher) payment after refinancing to a lower rate. The difference goes entirely to principal. A $300K refi from 7% to 6% saves $200/month. Continuing to pay the old amount means $200/month in extra principal — paying off the mortgage 7-8 years early.
