When is it not worth refinancing?

Don't refinance if you're close to paying off your mortgage (restarting a 30-year term costs more in interest), you plan to move within 2-3 years (won't recoup closing costs), or the rate difference is less than 0.5%.

How much does it cost to refinance?

Closing costs are typically 2-5% of the loan amount. On a $300,000 mortgage, that's $6,000-$15,000. Some lenders offer no-closing-cost refinances, but the rate is slightly higher.

Should I Refinance My Mortgage? When the Math Works

Q: Should I refinance my mortgage?

Refinance if your new rate is at least 0.75-1% lower than your current rate, you plan to stay long enough to recoup closing costs (typically 3-4 years), and the monthly savings justify the effort. Also consider refinancing to drop PMI, switch from ARM to fixed, or shorten your loan term.

Refinance when the math works: lower rate, lower payment, and you’ll stay long enough to break even on closing costs. The old “1% rule” is outdated — even a 0.5-0.75% reduction can save thousands if your balance is large enough.

Quick Decision Calculator

Current Rate	New Rate	Rate Drop	Monthly Savings ($300K Loan)	Break-Even (est.)
8.0%	7.0%	1.0%	$200	2-3 years
7.5%	6.5%	1.0%	$197	2-3 years
7.0%	6.5%	0.5%	$98	4-5 years
7.0%	6.0%	1.0%	$193	2-3 years
6.5%	5.5%	1.0%	$189	2-3 years
5.0%	4.0%	1.0%	$171	3 years

Break-even = closing costs ÷ monthly savings. Closing costs assumed at $6,000-$8,000.

Reasons to Refinance

Reason	When It Makes Sense
Lower rate	New rate is 0.75%+ lower and you’ll stay 3+ years
Drop PMI	Home value has increased to 80%+ LTV
ARM to fixed	Lock in a fixed rate before your ARM adjusts higher
Shorten term	30-year to 15-year: higher payment but save massively on interest
Cash-out	Need funds for high-ROI renovation or debt consolidation
Remove co-borrower	Divorce or partner separation

Reasons NOT to Refinance

Reason	Why
Rate drop is less than 0.5%	Savings won’t cover closing costs for years
You’re 15+ years into a 30-year mortgage	Most payments are principal now; restarting adds interest
Moving within 2-3 years	Won’t break even on closing costs
You’d roll closing costs into loan	Increases balance and total interest paid
Your credit has dropped significantly	Higher rate than current; not worth it
You’d extend from 15-year to 30-year	Lower payment but much more total interest

Break-Even Analysis

$300,000 loan, refinancing from 7.5% to 6.5%:

Item	Amount
Current monthly payment	$2,098
New monthly payment	$1,896
Monthly savings	$202
Closing costs	$7,500
Break-even point	37 months (3.1 years)

If you stay 5+ years: save $4,620 after recouping costs. If you stay 10 years: save $16,740.

Shortening Your Loan Term

Refinance From	Refinance To	Monthly Change ($300K, 6.5%)	Total Interest Saved
30-year at 7.0%	30-year at 6.5%	-$98/month	$35,000
30-year at 7.0%	15-year at 6.0%	+$531/month	$190,000
30-year at 7.0%	20-year at 6.25%	+$198/month	$130,000

Shortening your term increases payments but saves enormous amounts in total interest.

Cash-Out Refinance: When It Makes Sense

Use of Cash-Out Funds	Good Idea?
Home renovation that adds value	✅ Yes
Pay off 20%+ credit card debt	✅ Probably (if you won’t re-accumulate)
Emergency medical expenses	⚠️ Only if no better option
Vacation or lifestyle spending	❌ No
Investing in stocks	❌ Risky — borrowing against your home to invest

The Bottom Line

Refinance when the rate drop is at least 0.5-0.75%, you’ll stay past the break-even point, and the monthly savings improve your financial situation. Don’t refinance just because rates dropped slightly, and be cautious about extending your term or doing a cash-out refinance for non-essential purposes.