Refinancing makes sense when the monthly savings, over how long you plan to keep the loan, outweigh the closing costs. Everything else is noise.
The break-even calculation
Divide total closing costs by monthly savings. That's the number of months it takes for the refi to pay for itself. If you'll keep the loan longer than the break-even, the refi is a net positive.
Example: $6,000 closing costs, $300/month savings → 20-month break-even. Plan to stay 5+ years? Clear win. Selling in 12 months? Skip the refi.
The 1% rule is outdated
On a $500k+ balance, a 0.5% rate drop can produce meaningful savings. On a $150k balance, a 1% drop may not cover closing costs. Rules of thumb don't beat running the numbers on your actual file.
Rate-and-term vs. cash-out — decision framework
- Rate-and-term: existing rate is above market, you want a lower payment or shorter term, you're moving from ARM to fixed
- Cash-out: you need equity access AND your existing rate is not meaningfully below market
- Keep existing mortgage: your rate is well below market — use a HELOC or home equity loan instead
When NOT to refinance
- Planning to sell within 12–24 months
- Existing rate is already at or below current market
- Closing costs eat more than 24 months of monthly savings
- Existing loan has a prepayment penalty
- You're extending the term back to 30 years just to lower the payment (long-term interest cost usually goes up)
How long you need to stay
Break-even + at least 12 months of margin. If your break-even is 24 months and you plan to move in 30 months, the refi barely covers itself. Aim for a break-even that's less than half your expected remaining time in the property.
FAQs
What's the 'break-even' on a refinance?
Total closing costs divided by monthly savings. If closing costs are $6,000 and you save $300/month, break-even is 20 months. Stay in the loan longer than that and the refi pays for itself.
Is the 1% rule still valid?
Not really. The 1% rule of thumb (only refi if you can drop your rate by at least 1%) ignores loan size and closing costs. On a $500k+ balance, even a 0.5% rate drop can produce meaningful savings. On a $150k balance, a 1% drop may still not pay for the closing costs. Do the math on your file specifically.
When does refinancing not make sense?
If you're planning to sell within 12–24 months, if your existing rate is already below current market, if closing costs will eat more than 2–3 years of monthly savings, or if a prepayment penalty applies to your existing loan.
How much rate drop do I need?
It depends on loan size and closing costs — not a fixed threshold. We run the break-even math against your specific balance, closing costs, and time horizon before recommending a refi.
Related: Refinance break-even calculator · How much can I save? · Refinance hub · Refinance vs HELOC