When Is Refinancing Worth It?
Forget the one-percent rule. Divide the closing costs by the monthly saving and compare that with how long you will keep the loan.
Key takeaways
- Breakeven months = total closing costs ÷ monthly payment saving.
- If you will not hold the loan well past the breakeven, the refinance loses money.
- Restarting a 30-year term lowers the payment while potentially increasing lifetime interest.
- A 'no-closing-cost' refinance still has costs — they are in the rate or the balance.
- Cash-out refinances change the tax treatment of the interest on the amount taken out.
Short answer: refinance when the closing costs divided by the monthly saving gives a breakeven you will comfortably outlast. The commonly repeated "refinance when rates drop 1%" rule ignores loan size and costs, and it is wrong in both directions.
The only formula you need first
On a $400,000 balance, dropping from 7.25% to 6.5% saves roughly $200 a month. With $6,000 of closing costs, the breakeven is about 30 months. Keep the loan for six years and the refinance is clearly worthwhile; move in two and it was a loss.
The term reset that hides the cost
Refinancing a loan you have paid for six years into a fresh 30-year term lowers the payment partly because you re-amortized over a longer period, not only because the rate fell. Compare like with like: either look at a term that ends when your current loan would have, or compare total remaining interest rather than payments.
- Same payoff date, lower payment — a genuine improvement
- Later payoff date, lower payment — check total interest before celebrating
- Shorter term, higher payment — often the best long-run outcome if cash flow allows
What counts as a closing cost
- Lender fees: origination, underwriting, processing
- Third-party fees: appraisal, title, settlement, recording
- Discount points, if you are buying the rate down
- Prepaid interest and any escrow shortfall you fund
Reasons to refinance that are not about rate
- Removing FHA life-of-loan mortgage insurance by moving to conventional.
- Removing a co-borrower after a divorce or partnership change.
- Moving from an adjustable rate to a fixed rate before an adjustment.
- Shortening the term when your income has risen.
Frequently asked questions
- Is there a minimum rate drop that makes refinancing worth it?
- No. The breakeven depends on loan size and closing costs. On a large balance, a 0.5% drop can pay back in under two years; on a small balance, even 1.5% may not.
- Are refinance closing costs tax deductible?
- Most are not deductible. Points paid on a refinance are generally amortized over the life of the new loan rather than deducted in the year paid. See IRS Publication 936.
- How soon can I refinance again?
- It depends on the loan program and your lender's seasoning requirements. Some programs require six months of payments; ask before assuming.
Sources
- Consumer Financial Protection Bureau: Should I refinance? — accessed 2026-07-28
- Internal Revenue Service: Publication 936, Home Mortgage Interest Deduction — accessed 2026-07-28. Treatment of points paid on a refinance.
- Freddie Mac: Primary Mortgage Market Survey — accessed 2026-07-28
Educational content only. This is not a loan offer, and your actual terms depend on your lender, credit profile and property.
We do not sell leads and we do not rank lenders. Always compare official Loan Estimates.