Break-even is the number that decides it
Refinancing costs money up front — typically 2–5% of the loan in closing costs — and saves money monthly. The break-even point is simply how long you must stay for the savings to cover the costs.
In the default scenario, dropping from 7.25% to 5.75% on a $320,000 balance cuts the payment from about $2,282 to $1,867, a saving of roughly $414 a month. Against $6,400 in closing costs, break-even arrives at about 15 months.
The decision rule follows directly: if you are confident you will stay well past the break-even point, refinancing is worth it. If you might sell or refinance again before then, it is not. A common mistake is to focus on the monthly saving and never check how long it takes to recover the fee.
Resetting the clock can cancel out the savings
This is the trap that costs the most and gets discussed the least. A refinance usually restarts the amortisation schedule at 30 years. If you were 4 years into a 30-year loan, you have just added those 4 years back.
With the defaults, refinancing 26 remaining years into a fresh 30-year term at 5.75% saves about $33,226 over the life of the loan. That is real, but it is far less than the monthly saving suggests, because you are paying for four extra years.
Refinance into a 26-year term instead — matching your original payoff date — and the payment is about $1,979 rather than $1,867. You save $103 less each month, but total lifetime savings jump to roughly $88,171. That is more than double, for a payment difference most budgets would not notice.
The general principle: refinance to a term no longer than what you have left. If a lender only offers standard terms, take the 30-year and simply pay the amount the shorter term would have required.
When refinancing is and isn't worth it
The old rule of thumb was to refinance when rates dropped a full percentage point. It is a reasonable starting filter, but the honest answer depends on your balance and how long you will stay. On a large balance, even half a point can break even in under two years. On a small balance near the end of its term, two points may never pay off.
Cash-out refinancing is a different decision entirely. You are borrowing against home equity, usually at a higher rate than a rate-and-term refinance, and converting unsecured needs into debt secured by your house. Using it to consolidate credit cards trades a debt that damages your credit for one that can cost you your home.
Also watch for a rate that is only available with discount points. Paying points is prepaying interest, and it has its own break-even calculation stacked on top of the refinance's.
Costs to check before committing
Closing costs on a refinance commonly include an origination fee, appraisal, title insurance, and recording fees. Lenders must provide a Loan Estimate within three business days of application, which itemises all of it in a standardised format designed for comparison.
Beware the "no-cost refinance." The costs have not vanished — they are either rolled into the balance or paid for with a higher rate. Sometimes that is the right trade, particularly if you might move soon, but you should know which is happening.
Finally, check for a prepayment penalty on your existing mortgage. These are uncommon on US conventional loans but not extinct, and they can materially change the calculation.
Frequently asked questions
- How much does a refinance cost?
- Typically 2–5% of the loan amount. On a $320,000 loan that is $6,400 to $16,000. You can often roll it into the balance, though you then pay interest on it for the life of the loan.
- Should I refinance to a shorter term?
- If you can afford the higher payment, yes. Shorter terms carry lower rates and dramatically less lifetime interest. The calculator shows the same-term option specifically so you can compare.
- Does refinancing hurt my credit score?
- Slightly and temporarily. The application creates a hard inquiry and the new account lowers your average account age. Multiple mortgage inquiries within a short shopping window are typically treated as one, so comparing lenders is not penalised.
- Can I refinance if my home value has fallen?
- It is harder. Most conventional refinances require at least 20% equity. If you owe more than the home is worth, government-backed streamline programmes may still be available depending on your loan type.