A lower rate doesn't automatically mean a refinance is worth it — closing costs have to be earned back first. Here's the actual math.
The Break-Even Formula
| Input | Typical Range |
|---|---|
| Closing costs | 2%–5% of the loan amount |
| Break-even period | Closing costs ÷ monthly payment savings = months to break even |
| Rule of thumb rate drop | Often needs to be 0.5–1 percentage point lower to be worth the cost |
Example: $6,000 in closing costs on a refinance that saves you $150/month means a 40-month break-even point. If you plan to stay in the home less than 40 months, the refinance likely costs you more than it saves.
What Resets When You Refinance
A refinance restarts your amortization schedule — even at a lower rate, stretching a loan you're 8 years into back out to a new 30-year term can mean paying more total interest over time, even with lower monthly payments. This matters most for homeowners who are more than a few years into their current mortgage.
When It's Usually Worth It
- You plan to stay in the home well past the break-even point
- You're switching from an ARM to a fixed rate before a rate adjustment
- You're doing a cash-out refinance for a specific goal where the refinance cost is secondary to accessing the equity
- Your credit has improved significantly since your original loan, qualifying you for a meaningfully better rate
Sources: Standard mortgage industry closing-cost ranges and break-even calculation methodology as published by mortgage lenders and consumer finance education resources.
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