← Blog · May 14, 2026 · mortgage, refinance

Should You Refinance? The Break-Even Calculation

Rates dropped. Your inbox is full of refi pitches. Should you do it?

Here is the only math that matters. Take it in two steps.

Step 1: monthly savings

Look up your current monthly payment (principal + interest only — ignore taxes and insurance for this calc). Then plug your remaining balance into a mortgage calculator at the new rate and same remaining term. The difference between your current P&I and the new P&I is your monthly savings.

Example: $300k balance, currently 7%, 28 years left. Payment is about $2,037. Refi to 6%, same 28-year term. New payment is about $1,898. Savings: $139/month.

Step 2: closing costs vs monthly savings = break-even months

Refinancing has closing costs. Roughly 2-5% of the loan amount. Add up: origination, title insurance, appraisal, escrow, recording. On a $300k refi this is typically $6,000-12,000. Call it $7,500.

Break-even = closing costs / monthly savings = $7,500 / $139 = 54 months.

That is your number. If you plan to keep the house and the loan more than 54 months (4.5 years), the refi pays off. If you plan to sell or refi again sooner, it does not.

The catch: don't reset your clock

Refinancing from a 28-year-old loan into a new 30-year loan resets your term. Your monthly payment drops, but you just bought 32 more years of payments.

On the same example: refi to 6% for a NEW 30-year term and your payment drops to about $1,799. Looks better — $238/month savings, break-even ~31 months. But you added 2 years of payments, which is roughly $43,000 in interest. The "savings" evaporate.

If you refi, refi to the same remaining term (or shorter). Most lenders will let you pick. Or pay the lower required payment and voluntarily add the extra to principal — same effect, same math, more flexibility.

The rule of 0.75-1%

Rough guideline: rate has to drop at least 0.75% (and ideally 1%+) for refi to be obviously worth it after fees. Below 0.5% drop, you are basically paying the lender for the privilege of a lower payment. Between 0.5-0.75% it depends on how long you stay.

At today's rates this is harder to hit than it was during the 2021 refi boom — most people refinanced into 3% rates and aren't getting back there.

Special cases

Cash-out refi

Pulls equity out of your home as cash, at the new mortgage rate. Useful if the rate is much lower than your alternatives (credit card, personal loan). The break-even math is the same but you compare against the cost of NOT having that cash.

ARM to fixed

If you have an ARM (adjustable-rate mortgage) that's about to reset higher, refinancing to a fixed rate can be worth it even with no rate improvement, just to cap your future payments.

Removing PMI

Originally put down less than 20% and now your home value has appreciated enough that you have 20%+ equity? Refi to get rid of PMI. Sometimes this alone saves $150-300/month and pays back closing costs in 2-3 years.

The lazy alternative: ask your current lender

Sometimes your existing lender will offer a "rate modification" for a flat fee ($500-2,000), no full refi process. Worth a phone call before going through the full closing rigmarole.

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