When Does Refinancing Your Mortgage Make Sense?
Work out a refinance's break-even point, lifetime interest savings and net savings after closing costs, and avoid the term-reset trap.
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Free tool: Refinance CalculatorRefinancing replaces your mortgage with a new one, usually to get a lower rate, change the term or take cash out. A lower rate sounds like an easy win, but closing costs and a reset loan term can eat into the savings. This guide shows how to judge a refinance by its break-even point and its net savings, using the free Refinance Calculator.
The three numbers that decide it
- Monthly savings: your current payment minus the new one.
- Break-even point: closing costs ÷ monthly savings, the number of months it takes for the lower payment to repay the cost of refinancing.
- Net savings: the interest you save over the life of the loan, minus the closing costs.
If you'll stay in the home well past the break-even point and the net savings are clearly positive, refinancing is usually worth it.
Example: 5.5% to 4%
You owe $250,000 at 5.5% with 25 years left, and you're offered 4% for 25 years with $5,000 of closing costs:
- Payment: $1,535 → $1,320, saving $216 a month
- Break-even: 24 months
- Lifetime interest: $145,878 instead of $210,566, saving $64,688
- Net savings after closing costs: $59,688
If you stay at least two years, this refinance pays for itself, and over the full term it saves about $60,000.
Watch out for resetting the clock
Refinancing into a new 30-year loan when you have fewer years left lowers the payment partly by stretching the loan out. Take $300,000 at 7% with 28 years left, refinanced to 6% with $6,000 of costs:
| New term | Monthly savings | Break-even | Interest saved |
|---|---|---|---|
| 28 years | $193 | 32 months | $65,000 |
| 30 years | $240 | 25 months | $37,531 |
The 30-year loan looks better month to month but saves about $27,500 less interest, because you pay for two extra years. To keep the savings, choose a term no longer than the years you have left, or keep paying your old amount on the new loan.
Refinancing to a shorter term
Moving to a shorter term, such as 15 years, usually raises the payment, so there's no break-even in the usual sense, but the interest savings can be large. In the first example, refinancing to 4% over 15 years instead raises the payment by $314 a month but saves about $127,706 of interest. The calculator shows the break-even as "Never" in that case, so judge it by the lifetime and net savings.
Closing costs and other considerations
Closing costs often run 2% to 5% of the loan and include lender fees, an appraisal and title insurance. A "no-closing-cost" refinance covers them with a higher rate or adds them to the balance, so compare offers on the rate and the costs together. Also consider:
- How long you'll stay. If you might move before the break-even point, refinancing loses money.
- Your credit score and equity, which affect the rate you're offered.
- Cash-out refinancing raises your balance; judge it by what you'll use the money for, not by the payment.
How to use the Refinance Calculator
- Open the Refinance Calculator.
- Enter your current loan: the balance, the rate and the remaining years.
- Enter the new loan: the new rate, the new term and the closing costs.
- Add a monthly extra payment only if you'd make it on the new loan but not on your current one, because the calculator applies it to the new loan only.
- Read the results: the current and new payments, the monthly savings, the break-even point, the lifetime interest savings and the net savings after closing costs, with a chart of both balances and the interest saved, a total-cost comparison and a yearly breakdown.
Frequently asked questions
How do I calculate the break-even point on a refinance?
Divide the closing costs by the monthly savings. $5,000 of costs with $216 a month of savings breaks even in about 24 months.
How much lower does the new rate need to be?
There's no fixed rule. A common guide is at least half to one percentage point, but what matters is whether the monthly savings repay the closing costs before you move, and whether the net savings are worth it.
Does refinancing restart my mortgage?
Yes. A refinance is a new loan with a new term. Choosing a term no longer than the years you have left keeps you from paying for extra years.