Should I refinance my mortgage?
Refinance when the monthly savings repay the closing costs well before you expect to sell or pay off the loan, and the new loan doesn't cost more over its life. At today's 7.4% average 30-year rate, a $300,000 balance at 8.4% with 27 years left drops from $2,345 to $2,077 a month on a new 30-year loan. $9,000 of closing costs (3% of the balance) take 34 months to earn back. The new loan also runs 3 years longer, so after closing costs it saves $2,893 over its life.
Three things decide it: how far your rate falls, what the refinance costs, and how long you'll keep the new loan. The monthly saving is only half the story, since a new 30-year loan lowers the payment partly by stretching it out. Today's 7.4% average is only 0.39 points below the 7.79% the 30-year rate reached in October 2023, so refinancing for a lower rate pays mostly on loans well above the average: on the example balance, a half-point drop takes 55 months to break even and a one-point drop 34.
How long does it take to break even on a refinance?
The break-even is the number of months it takes for the lower payments to repay what the refinance cost, the same calculation the Federal Reserve's refinancing worksheet uses:
Break-even months = closing costs ÷ monthly savings
$9,000 of closing costs ÷ $267.50 saved a month = 33.6 months, so the example refinance pays for itself in month 34. A half-point lower rate on the same loan takes 55 months; a two-point drop takes 19. If you might sell or refinance again before the break-even, the refinance loses money.
| Rate drop | 2% costs ($6,000) | 3% costs ($9,000) | 4% costs ($12,000) | 6% costs ($18,000) |
|---|---|---|---|---|
| 0.25 points | 53 months | 79 months | 105 months | 157 months |
| 0.5 points | 37 months | 55 months | 73 months | 109 months |
| 0.75 points | 28 months | 42 months | 56 months | 84 months |
| 1 point | 23 months | 34 months | 45 months | 68 months |
| 1.5 points | 17 months | 25 months | 33 months | 49 months |
| 2 points | 13 months | 19 months | 26 months | 38 months |
How much does a 1% lower rate save on a mortgage?
On a $300,000 balance with 27 years left, refinancing from 8.4% to 7.4% on a new 30-year loan cuts the payment by $268 a month. A half-point drop saves $165 a month and a two-point drop $477. Because the new loan restarts at 30 years, small drops can lower the payment and still cost more in total.
| Your rate now | Payment now | New payment | Saved a month | Break-even | Over the loan |
|---|---|---|---|---|---|
| 7.65% (−0.25 points) | $2,192 | $2,077 | $115 | Month 79 | $46,497 lost |
| 7.9% (−0.5 points) | $2,243 | $2,077 | $165 | Month 55 | $30,179 lost |
| 8.15% (−0.75 points) | $2,293 | $2,077 | $216 | Month 42 | $13,714 lost |
| 8.4% (−1 point) | $2,345 | $2,077 | $268 | Month 34 | $2,893 saved |
| 8.9% (−1.5 points) | $2,448 | $2,077 | $371 | Month 25 | $36,519 saved |
| 9.4% (−2 points) | $2,554 | $2,077 | $477 | Month 19 | $70,667 saved |
The last column is the interest saved less the closing costs if you keep the new loan to its last payment. The same refinance over the 27 years you have left, if a lender offers that term, saves $56,559 over its life instead of $2,893.
Is the 1% rule for refinancing right?
It's a rough guide, not a rule. The 1% rule says to refinance once rates are a full percentage point below yours. With 3% closing costs, a one-point drop on the example loan breaks even in 34 months, which pays if you keep the loan well past that. But the rule ignores the three things that matter: your closing costs, your loan size and how long you'll keep the loan.
Economists Sumit Agarwal, John Driscoll and David Laibson worked out when refinancing is best in “Optimal Mortgage Refinancing: A Closed-Form Solution” (Journal of Money, Credit and Banking, 2013). For typical borrowers, the rate drop that justifies refinancing came to 1 to 2 points, and more for smaller loans, because part of the cost is a fixed fee that a small loan's savings take longer to repay. Their threshold is higher than a simple break-even suggests because it counts the value of waiting: rates might fall further, and refinancing now means paying closing costs again to catch a later drop.
| Loan | Closing costs ($2,000 + 1%) | Optimal rate drop | Break-even of a 1-point drop |
|---|---|---|---|
| $1,000,000 | $12,000 | 1.07 points | 14 months |
| $500,000 | $7,000 | 1.18 points | 16 months |
| $250,000 | $4,500 | 1.39 points | 21 months |
| $100,000 | $3,000 | 1.93 points | 34 months |
The optimal drops come from the paper's Table 1, which assumes a 28% tax bracket and the interest-rate conditions of its time; the break-even column refinances 27 years left at 8.4% into a 30-year loan at 7.4%. Use the 1% rule as a prompt to run the numbers, not as the answer.
How much does it cost to refinance a mortgage?
Freddie Mac says to expect 3% to 6% of the loan principal, depending on your lender, credit score and location: $9,000 to $18,000 on a $300,000 loan. The median refinance in 2023 had $7,329 in total loan costs, including origination fees and any discount points, up from $4,979 in 2022, according to the Consumer Financial Protection Bureau's analysis of mortgage disclosure data. The median discount points paid on refinance loans came to about $3,900.
The costs cover the lender's origination and underwriting fees, the appraisal, title services, a credit report and government recording fees, and sometimes survey and attorney fees. Each point you pay costs 1% of the loan and buys a lower rate, while lender credits lower your closing costs in exchange for a higher rate, as the CFPB explains. Count points in the calculator's closing costs, and enter the rate they buy. Compare Loan Estimates from several lenders: credit checks from mortgage lenders within 45 days are recorded as a single inquiry, according to the CFPB.
Should I roll closing costs into my refinance?
Adding the costs to the loan saves cash up front but costs more over time. Rolling $9,000 into the example refinance makes the new payment $2,139 instead of $2,077, moves the break-even from month 34 to month 43, and changes a $2,893 lifetime saving into a $10,540 lifetime cost, because you pay 7.4% interest on the costs for 30 years. A "no-closing-cost" refinance works the same way, or charges a higher rate in exchange for lender credits.
Should I refinance to a 15-year or a 30-year loan?
A 15-year refinance at the 6.71% average costs $2,648 a month on the example $300,000 balance, $303 more than the $2,345 payment now, but cuts the interest left from $459,663 to $176,654 and pays the loan off 12 years sooner: it saves $274,009 over its life after closing costs. A new 30-year loan at 7.4% lowers the payment to $2,077 but saves $2,893 over its life, because it adds 3 years of payments.
| Keep your loan | New 30-year | New 15-year | |
|---|---|---|---|
| Rate | 8.4% | 7.4% | 6.71% |
| Monthly payment | $2,345 | $2,077 | $2,648 |
| Interest left to pay | $459,663 | $447,770 | $176,654 |
| Paid off in | 27 years | 30 years | 15 years |
| Break-even | Month 34 | No monthly savings | |
| Saved over the loan, after costs | $2,893 | $274,009 |
How the calculator works
- Your current payment is the fixed-rate payment that repays your balance over the years left at your rate, which is what a loan paid on schedule charges. The new payment uses the same formula on the new loan: your balance, plus the closing costs if you add them to it.
- Break-even is the first month the payments saved cover the closing costs: the costs divided by the monthly savings, rounded up. Costs added to the loan are repaid a little with each payment, so what's left of them shrinks as the loan is paid down and the break-even comes a month or so sooner. A new loan with a higher payment has no break-even; it pays, if at all, through the interest it saves.
- Lifetime savings are the interest left on your current loan less the interest on the new one and the closing costs, if you keep each loan to its last payment. Taxes, mortgage insurance and what the money could earn elsewhere are left out.
- The new rate defaults to Freddie Mac's 7.4% 30-year average (6.71% for 15 years). Freddie Mac doesn't survey 20-year loans, so enter a lender's quote. Closing costs default to 3% of the balance, the low end of Freddie Mac's range.
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