When to Refinance Your Mortgage: A Decision Guide That Saves You Money
Refinancing your mortgage can save you tens of thousands of dollars — or it can cost you money if you do it at the wrong time. I’ve watched homeowners rush to refinance because they heard rates dropped by a quarter point, only to break even after five years of “savings.” That’s not a win. That’s treading water with extra paperwork.
This guide is about the math — the real math — behind the refinance decision. Not vague rules of thumb, but actual numbers you can plug in tonight and have a clear answer by tomorrow morning.
The Break-Even Calculation: The Only Number That Matters
Before anything else, calculate your break-even point. This tells you how many months it takes for your monthly savings to cover the cost of refinancing.
Here’s a concrete example. Say you owe $320,000 on a 30-year fixed at 7.1%. A lender offers you 6.25% on a new 30-year fixed. Your closing costs come to $4,800.
- Current monthly payment (P&I): $2,152
- New monthly payment (P&I): $1,970
- Monthly savings: $182
- Break-even: $4,800 ÷ $182 = 26 months
If you plan to stay in the home at least 26 months, this refinance makes financial sense. If you’re thinking about selling within two years, you’ll lose money on the deal. Use a mortgage calculator to run your own numbers with your exact balance and rate.
One detail people miss: the break-even calculation above is simplified. It doesn’t account for the fact that your new loan resets the amortization clock, meaning you’ll pay more interest over the full life of the loan. I’ll get to that below.
The 1% Rule — And Why It’s Outdated
You’ve probably heard the old advice: “Only refinance if you can drop your rate by at least 1%.” This rule made sense when closing costs were lower and most people stayed in their homes for 15+ years. It’s too simplistic for 2026.
On a $250,000 loan, a 0.5% rate reduction saves about $85/month. With $4,000 in closing costs, you break even in 47 months — just under four years. If you’re staying put for five or more years, that half-point drop is absolutely worth pursuing.
On a $600,000 loan, the same 0.5% drop saves $200/month. Break-even hits at 20 months. The larger your loan balance, the less of a rate drop you need to justify refinancing. Forget the 1% rule. Do the math for your specific situation.
Rate-and-Term vs. Cash-Out: Two Different Animals
A rate-and-term refinance replaces your existing mortgage with a new one at better terms — lower rate, shorter term, or both. Your loan balance stays roughly the same (plus closing costs if you roll them in).
A cash-out refinance lets you borrow against your home equity and pocket the difference. If your home is worth $500,000 and you owe $300,000, you could refinance for $380,000 and walk away with $80,000 in cash (minus closing costs).
Cash-out rates are typically 0.125% to 0.5% higher than rate-and-term, and most lenders cap your loan-to-value at 80%, meaning you need to keep at least 20% equity in the home.
When Cash-Out Makes Sense
- High-interest debt consolidation. If you’re carrying $40,000 in credit card debt at 22% APR, rolling it into a 6.5% mortgage saves you roughly $6,200 per year in interest. Just make sure you don’t run those cards back up.
- Home renovation with strong ROI. A kitchen remodel that costs $35,000 and adds $50,000 in value is a solid use of cash-out funds. Check our renovation guide for projects with the best return on investment.
- Investment with reliable returns. Some homeowners use cash-out to fund rental property down payments. This is higher-risk and requires serious number-crunching, but it’s a legitimate strategy for experienced investors.
When Cash-Out Doesn’t Make Sense
Vacations. Cars. Consumer spending. If the thing you’re buying depreciates or disappears, don’t borrow against your house to pay for it. You’re converting unsecured spending into secured debt — if things go sideways, you can lose your home.
The 2026 Rate Environment
As of early 2026, 30-year fixed rates are hovering between 6.0% and 6.75%, depending on credit profile and loan size. That’s down from the 7.5% peaks of late 2023, but still well above the 3% rates that millions of homeowners locked in during 2020-2021.
If you bought or last refinanced when rates were above 7%, the current environment offers a legitimate savings opportunity. If you’re sitting on a 3.5% rate from 2021, there’s no refinance scenario that makes sense unless you desperately need cash and have no other options.
Track where rates are heading on our mortgage rates page — we update it weekly with national averages and lender-specific offers.
What Refinancing Actually Costs
Closing costs on a refinance typically run 2% to 5% of the loan amount. On a $300,000 loan, that’s $6,000 to $15,000, though the average falls between $3,500 and $6,500 for most borrowers.
Common line items include:
- Loan origination fee: 0.5% to 1% of loan amount ($1,500-$3,000)
- Appraisal: $350-$600
- Title search and insurance: $700-$1,200
- Recording fees: $50-$250
- Credit report: $25-$50
- Prepaid interest: varies
Some lenders advertise “no-closing-cost” refinances. Read the fine print — they’re rolling the costs into your loan balance or charging a higher rate to compensate. You’re still paying; it’s just hidden. That said, a no-cost refi can make sense if you’re not sure how long you’ll stay in the home, since there’s nothing to recoup.
The Loan Term Trap
This is the part most refinance articles skip. When you refinance a 30-year mortgage into another 30-year mortgage, you reset the clock. If you’re 8 years into your current loan, you’ve been building equity at an accelerating rate (thanks to amortization). A new 30-year loan puts you back at square one, where most of your payment goes to interest.
Example: You’re 8 years into a $350,000 loan at 7.0%. Your remaining balance is about $315,000, and you have 22 years left. If you refinance that $315,000 into a new 30-year loan at 6.25%, your monthly payment drops by $170 — but you’ll pay an additional $42,000 in total interest over the life of the loan compared to sticking with your current mortgage.
The fix? Refinance into a shorter term. A 20-year or 25-year loan keeps you closer to your original payoff timeline. Or refinance into a 30-year for the lower payment but make extra principal payments when you can.
Credit Score Requirements
Most conventional refinances require a 620+ credit score, but you’ll get the best rates at 740 and above. The rate spread between a 660 score and a 760 score can be 0.5% to 0.75%, which translates to $100-$150/month on a $300,000 loan.
If your credit has improved significantly since you took out your original mortgage, refinancing could save you more than the rate drop alone suggests. Check your score before you apply, and if you’re close to a threshold (like 739), spend a month or two paying down credit card balances to bump it up.
Shop at Least Three Lenders (Seriously)
A 2024 Freddie Mac study found that borrowers who got five rate quotes saved an average of $2,914 over the life of their loan compared to borrowers who went with the first offer. Even getting three quotes saved $1,435 on average.
Don’t just compare rates. Compare APR (which includes fees), closing costs, lock periods, and whether the lender offers float-down options if rates drop between locking and closing. Our best mortgage lenders page breaks down the top options by loan type, fees, and customer service ratings.
Pro tip: submit all your applications within a 14-day window. Credit scoring models treat multiple mortgage inquiries in a short period as a single hard pull, so your score won’t take repeated hits.
Streamline Refinance: The Fast Track for FHA and VA Loans
If you have an FHA or VA loan, you may qualify for a streamline refinance, which skips the appraisal and much of the paperwork. FHA Streamline requires no income verification and no home appraisal — just proof you’ve made your last six payments on time. VA Interest Rate Reduction Refinance Loans (IRRRLs) work similarly.
Streamline refis typically close in 2-3 weeks and cost $1,500-$3,000 in fees. If rates have dropped even 0.25% since your original loan, a streamline refi is almost always worth it because the costs are so low.
HELOC: The Alternative Worth Considering
If you only need cash and your current mortgage rate is already low, a home equity line of credit (HELOC) might be smarter than a cash-out refinance. A HELOC lets you borrow against your equity without touching your first mortgage.
HELOC rates are variable (currently 7.5% to 9.5% for most borrowers), so they’re more expensive than a fixed-rate cash-out refi on a per-dollar basis. But if you only need $30,000 for a renovation and your first mortgage is at 3.5%, it makes zero sense to refinance the entire $280,000 balance at 6.5% just to access that cash.
The math: keeping your 3.5% first mortgage and adding a $30,000 HELOC at 8.5% costs you far less than refinancing everything into a single 6.5% loan. Run both scenarios through a mortgage calculator to see the difference for your numbers.
When You Should NOT Refinance
- You’re moving within 2-3 years. You probably won’t hit break-even.
- Your current rate is below 5%. Unless you need cash urgently, hold onto that rate. You may never see it again.
- You’re deep into your current loan. If you’re 20 years into a 30-year mortgage, most of your payment is principal. Refinancing restarts the interest-heavy early years.
- Your credit has dropped. If your score is lower than when you got your original mortgage, you’ll likely get a worse rate.
- You can’t stop spending. Cash-out refis to pay off credit cards only work if you change the behavior that created the debt.
The Decision Framework
Pull up your current mortgage statement. Write down your balance, rate, and remaining term. Then ask three questions:
- Can I drop my rate by enough to break even within 2-3 years? (Use the refinance guide for step-by-step help.)
- Am I willing to restart my loan term, or should I go shorter?
- Have I gotten quotes from at least three reputable lenders?
If the answer to all three is yes, refinancing is likely a smart move. If you’re unsure on any of them, slow down and do more homework. A refinance should make you wealthier over time — if the math doesn’t clearly support that, wait. Rates will shift again, and the next opportunity might be better.
For a broader view of the buying and financing process, our home buying guide covers everything from pre-approval through closing day.