Refinancing makes sense when the monthly savings recover your closing costs well before you expect to sell or refinance again. Divide the costs by the monthly savings to find the break-even. A rate drop of around 0.75 to 1 percentage point is a common rule of thumb, but smaller drops can work on large loans, and other goals (dropping FHA insurance, changing the term, taking cash out) can justify it too.
The break-even calculation
If refinancing costs $6,000 and lowers your payment by $200 a month, you break even in 30 months. If you’ll stay in the home well beyond that, it’s likely worth it.
Try it: Refinance break-evenEnter your current loan and a new offer to see the monthly savings, the break-even and total savings over the years you’ll stay.Good reasons to refinance
- A lower rate that pays off within your timeline.
- Removing FHA mortgage insurance once you have about 20% equity; see how to remove PMI.
- Switching from an ARM to a fixed rate before it adjusts.
- Shortening your term to save interest; see 15 vs. 30-year.
- Taking cash out for major repairs or high-interest debt; compare with a HELOC in cash-out refinance vs. HELOC.
Watch out for
- Resetting the clock: refinancing into a new 30-year loan lowers the payment but can add years and interest. Consider a term close to what you have left.
- Rolling costs into the loan: convenient, but you pay interest on them.
- Moving soon: if you’ll sell before the break-even, it costs you money.
Know what rate you could get
Your rate depends on your credit, equity and loan type. Estimate it with the mortgage rate estimator, see what your home is worth now with the home value estimator, and test how sensitive your savings are to the rate with the rate sensitivity tool.
Streamline refinances
FHA and VA borrowers may qualify for streamlined refinances (FHA Streamline, VA IRRRL) with less paperwork and often no appraisal, if the refinance gives a clear benefit.
Shop like you did the first time
Get several Loan Estimates on the same day and compare total costs with compare mortgage offers. If you only want a lower payment and have cash, a recast may be cheaper.
Common questions
How much should rates drop before I refinance?
A drop of about 0.75 to 1 percentage point is a common rule of thumb, but the break-even point is what matters.
How long does it take to break even on a refinance?
Divide the closing costs by the monthly savings. If you’ll stay well past that point, refinancing usually pays.
Does refinancing restart my loan?
It can. A new 30-year loan adds years; choosing a term close to what you have left avoids that.
Updated October 2026. Educational content. OfferBacked is not currently a lender and doesn’t issue pre-approvals or loans.