Rate And Term Refinance
A rate-and-term refinance replaces your current mortgage with a new one that has a different interest rate, a different loan term, or both — without borrowing any extra money. It’s the most common type of refinance, and the entire point is to save money on your monthly payment or total interest.
You’re not pulling cash out. You’re not changing the loan balance (except to roll in closing costs if you choose). You’re simply swapping one set of loan terms for better ones.
When Rate-and-Term Refinancing Saves Money
The classic scenario: rates drop. You have a $300,000 mortgage at 7.5%. Rates fall to 6.25%. Refinancing cuts your monthly payment from $2,098 to $1,847 — saving $251/month or $3,012/year. Over the remaining life of the loan, that’s over $75,000 in interest savings.
But there’s a cost to get there. Closing costs for a rate-and-term refi run 1.5%–2.5% of the loan amount — roughly $4,500–$7,500 on $300,000. That’s where the break-even calculation matters.
The Break-Even Calculation
This is the single most important number in any refinance decision:
Break-even months = Total closing costs / Monthly savings
Using our example: $6,000 in closing costs / $251 monthly savings = 24 months. If you’ll keep the loan longer than 24 months, the refinance pays for itself. If you’re selling in 18 months, you’ll lose money.
| Closing Costs | Monthly Savings | Break-Even | Worth It If You Stay… |
|---|---|---|---|
| $4,000 | $150 | 27 months | 2.5+ years |
| $6,000 | $250 | 24 months | 2+ years |
| $6,000 | $100 | 60 months | 5+ years |
| $8,000 | $350 | 23 months | 2+ years |
| $8,000 | $150 | 53 months | 4.5+ years |
Rate Drop vs. Term Change
Lowering your rate reduces your monthly payment and total interest. Simple win if the break-even math works.
Shortening your term (say, 30-year to 15-year) usually increases your monthly payment but dramatically cuts total interest. On $300,000: a 30-year at 7% costs $418,527 in total interest. A 15-year at 6.5% costs $170,388. That’s $248,139 in savings — but your monthly payment jumps from $1,996 to $2,613.
Doing both — dropping your rate AND shortening your term — is the ideal scenario but requires a significant rate decrease or a willingness to accept a higher payment.
Common Mistakes
Restarting the 30-year clock. If you’re 7 years into a 30-year mortgage and refinance into another 30-year term, you’ve added 7 years of payments. Yes, the monthly payment drops — but you’re paying interest for an extra 7 years. Consider a 20-year or 25-year term to stay on a similar payoff timeline.
Rolling closing costs into the loan. Adding $6,000 in closing costs to your balance means paying interest on that $6,000 for 30 years. At 6.5%, that’s an additional $7,600 in interest. Pay closing costs out of pocket if you can.
Refinancing too often. Each refi resets your amortization schedule, meaning you go back to paying mostly interest. If you’ve refinanced three times in eight years, you might have barely touched the principal.
Frequently Asked Questions
How much does my rate need to drop to make refinancing worth it?
There’s no universal threshold. Forget the old “1% rule.” What matters is your specific break-even timeline and how long you’ll keep the loan. A 0.50% rate drop with low closing costs and a 5-year horizon can absolutely be worth it. A 1.5% drop with high closing costs and a 2-year timeline might not be. Run your actual numbers through our refinance calculator to see the break-even point, and use the mortgage calculator to compare monthly payments side by side.