How to know if refinancing is worth it
Refinancing replaces your current mortgage with a new one, ideally at a lower rate. The key number is the break-even point: how many months of savings it takes to recover the closing costs. If you plan to stay in the home longer than that, refinancing usually makes sense.
Break-even (months) = Closing costs ÷ Monthly savings
Example
With $300,000 left on a mortgage at 7.2% and 27 years remaining, the payment is about $2,103. Refinancing into a new 30-year loan at 6.0% drops it to about $1,799 — a saving of $304 a month. With $5,000 in closing costs, you break even in about 17 months.
Watch the loan term
Resetting to a new 30-year loan lowers your payment partly by stretching it out. To see the real benefit, compare total interest — or choose a shorter term such as 20 or 15 years.
When refinancing may not help
- You plan to sell or move before the break-even point.
- The new rate is only slightly lower and closing costs are high.
- You're far into your current loan and would restart a long term.
Common questions
How much lower should my rate be to refinance?
A common rule of thumb is at least 0.5%–1% lower, but the real test is your break-even point versus how long you plan to stay.
How much does it cost to refinance?
Closing costs usually run 2%–5% of the loan amount. Some lenders offer no-closing-cost refinances in exchange for a slightly higher rate.
Does refinancing hurt my credit score?
A credit check causes a small, temporary dip. Rate shopping with several lenders within about two weeks usually counts as a single inquiry.
Can I refinance to a shorter term?
Yes. Moving from 30 to 15 years often gets a lower rate and saves a lot of interest, though the monthly payment may rise.
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