Break-even point
28 months
Refinance recommended if you'll stay past then.
Monthly savings$182
Lifetime interest saved$32,800
Current payment$1,862
New payment$1,680
Closing costs vs monthly savings vs how long you'll keep the loan. The break-even is the only number that matters.
Every refinance pitch eventually reduces to one ratio: how many months until your monthly savings repay the closing costs. If you'll keep the loan longer than that, you net out ahead. If you'll sell or refinance again sooner, the lender wins.
Closing costs — origination, appraisal, title, recording, prepaid escrow. Disclosed on the Loan Estimate.Old payment — your current principal-and-interest payment (escrow excluded).New payment — quoted rate plugged into a standard amortization at the new term.The break-even is necessary but not sufficient. You also need lifetime interest savings to exceed closing costs. Resetting a 20-year-old mortgage into a fresh 30-year can drop the monthly payment while raising the total interest paid — the calculator above shows both numbers so you don't fool yourself with the headline figure.
The "1% drop" rule of thumb works for plain-vanilla refinances at typical balances. Outside those bounds the answer flips. The grid below applies to a $300,000 balance and $6,000 closing costs.
| Rate drop | Monthly savings | Break-even | Verdict (keep loan 7+ yrs) |
|---|---|---|---|
| 0.25% | ~$50 | ~120 months | Skip — too marginal |
| 0.50% | ~$100 | ~60 months | Borderline — only if no-cost |
| 0.75% | ~$150 | ~40 months | Refinance if staying long-term |
| 1.00% | ~$200 | ~30 months | Clear yes |
| 1.50% | ~$300 | ~20 months | Easy yes |
| 2.00%+ | ~$400+ | ~15 months | Refinance even with reset |
The cheapest way to keep monthly cost low and avoid resetting the clock is to refinance to a term equal to your remaining years (e.g. into a 25-year if you have 25 left). Many lenders offer odd terms on request — they just don't advertise them.
Sources: Freddie Mac Primary Mortgage Market Survey (PMMS), CFPB Loan Estimate guidance under TILA-RESPA, IRS Publication 936 (Home Mortgage Interest Deduction), Federal Housing Finance Agency Refinance Activity Reports.
Mortgage decisions interact with credit, taxes, retirement contributions, and household risk tolerance. The break-even math here is the right starting point, not the full picture. Run the loan-officer disclosures past a CPA or fee-only fiduciary before you sign.
Multiply the monthly payment drop by the months you'll keep the loan, then subtract closing costs. On a $300,000 balance, dropping from 7.0% to 6.0% saves roughly $200/month. Over 10 years that's $24,000 of savings; net of $6,000 closing costs, about $18,000. Hold the loan to maturity and the lifetime number is much larger — but only if you don't reset the amortization clock.
Per Freddie Mac and the CFPB, expect 2–5% of the loan amount: $4,000–$15,000 on a typical conforming mortgage. The big line items: origination (0.5–1%), appraisal ($500–$800), title insurance ($800–$2,000), and prepaid escrow (varies by tax cycle). Required disclosures appear on the Loan Estimate within 3 business days of application — compare line items across lenders, not just the rate.
It's only free in the brochure. The lender either rolls costs into the principal (you finance them at the loan's rate over 30 years) or gives you a credit in exchange for a roughly 0.25–0.50% higher rate. Either way you pay — just on a different schedule. The math favors no-cost refinances if you'll sell or refinance again within 3–5 years; otherwise the higher rate eats the savings.
Per Freddie Mac PMMS, 15-year rates have run 0.50–0.85% below 30-year rates over the past decade. Combined with the shorter term you typically pay less than half the lifetime interest, but the payment goes up roughly 40–50%. The honest test: take a 30-year and pay it like a 15. If you'll actually do that, the 30-year flexibility wins. If you won't, the contractual 15-year forces the discipline.
Yes, slightly and temporarily. The application triggers a hard inquiry (5–10 point dip) and the new account lowers your average credit-account age. If you shop multiple lenders within a 14–45 day window, FICO and VantageScore treat them as a single inquiry. Most borrowers recover within 3–6 months as the new account ages.
Yes, but you'll usually pay PMI on a conventional refinance below 80% LTV. FHA streamline refinances allow it without re-appraisal if you're already FHA. VA IRRRL (Interest Rate Reduction Refinance Loan) allows up to 100% LTV for eligible veterans with no appraisal in many cases. The break-even math has to include any new mortgage insurance premium.
A cash-out refinance replaces your mortgage with a larger one and pays you the difference. Conventional caps at 80% LTV, FHA at 80%, VA up to 90%. Use cases that pencil: consolidating high-rate debt (credit-card APR ~21% vs mortgage ~6%), funding a major home improvement that adds documented value, or freeing trapped equity for an investment whose return exceeds your mortgage rate. Use cases that usually don't pencil: discretionary spending, vacations, or speculation.
Compute total remaining interest on your current loan (current payment × months remaining − current balance) and compare to total interest on the new loan (new payment × new term in months − new balance). Add closing costs to the new side. If you're 8 years into a 30-year and refinancing to a fresh 30-year, you're resetting the clock — so even with a lower rate the lifetime cost can rise. The break-even calculator above does this comparison for you.
The 1%-drop rule of thumb is a heuristic, not law. The honest test has two conditions: (a) the break-even is well inside the time you'll keep the home, and (b) lifetime interest savings exceed closing costs. If both are true today, the option value of waiting is small — rates that have dropped enough to make the math work are not guaranteed to drop further, and re-running the math when they do drop is free.
Per IRS Publication 936, mortgage interest is deductible on home-acquisition debt up to $750,000 (post-TCJA, $1M for loans originated before December 16, 2017). A rate-and-term refinance keeps the original acquisition basis. A cash-out refinance: the cash-out portion is only deductible if used to substantially improve the home. TCJA grandfathered-debt rules are nuanced — talk to a CPA before assuming deductibility on a cash-out.