Forget the 1% rule
You'll hear that you should only refinance when rates drop 1% below your current rate. That's a useful rough heuristic but it ignores the actual math: your break-even point.
The real question is — given the closing costs of refinancing and the monthly savings from a lower rate — how many months until you've saved enough to recoup the costs? If you'll stay in the home longer than that break-even point, the refinance pencils.
Calculating break-even
Two numbers to know:
- Closing costs on the refinance — typically 2–5% of the loan amount.
- Monthly savings — your old payment minus your new payment.
Break-even = closing costs ÷ monthly savings.
Example: $400,000 mortgage. Refinancing drops your rate from 7.0% to 6.0%, saving $260/month. Closing costs are $8,000. Break-even = $8,000 ÷ $260 = 31 months.
If you'll stay in the home longer than 31 months, the refinance is worth it. Shorter than that, and you'll lose money on the move.
Beyond the 1% rule
Sometimes refinancing makes sense even with a smaller rate drop:
- Larger loan amounts mean bigger dollar savings per basis point of rate change. Refinancing a $1M jumbo for 0.5% lower can save more than refinancing a $200K loan for 1% lower.
- Eliminating PMI or MIP can add $100–$300/month to savings on top of the rate drop.
- Switching from ARM to fixed if your ARM is approaching its first reset.
- Shortening the term from 30 to 15 years can drop your rate further and accelerate payoff, even when monthly payment goes up.
When NOT to refinance
- You'll move within the break-even window. The closing costs eat the savings.
- You're early in your current loan and would re-amortize over 30 years, paying more lifetime interest even at a lower rate.
- Your credit has dropped since your original loan — the new rate might not be meaningfully better.
- Closing costs are too high relative to savings. Sometimes the math just doesn't work.
The cash-out variant
If you want to tap equity rather than just lower your rate, cash-out refinancing is the path. The break-even math gets more nuanced because part of the loan is for cash you wouldn't otherwise have. Worth modeling separately.
Want a refinance analysis on your specific scenario?
We'll run the numbers and tell you whether the math works — straight, no spin. Reach out.