When does it make sense to refinance your mortgage?

Refinancing makes sense when you can lower your rate by at least 0.5–1%, you'll stay in the home long enough to recoup closing costs (typically 2–4 years), and your credit and equity have improved enough to qualify for a meaningfully better rate.

A mortgage refinance replaces your existing loan with a new one — ideally at a lower rate, a different term, or to pull out equity. Like buying points, refinancing is a break-even math problem: closing costs (typically 2–5% of the loan amount) need to be recouped through monthly savings before you sell or refinance again. The CFPB's refinancing guide is the authoritative starting point.

The break-even calculation

Break-even months = closing costs ÷ monthly payment reduction. If your new loan cuts $200/month from your payment and closing costs are $6,000, break-even is 30 months (2.5 years). Stay past 30 months and you save money. Sell or refinance again before that and you paid closing costs for no net benefit.

Refinance break-even example

$350,000 balance. Current rate: 7.50%. Refinance rate: 6.50% on same balance. Monthly savings: approximately $230. Closing costs: $8,000. Break-even: 35 months (~3 years). If you plan to stay 5+ years without refinancing again, this refi makes sense. If you'll move in 2 years, it doesn't.

Situations that make refinancing worth it

Rate dropped 0.75–1%+ since you originated — the rate reduction needs to be large enough that monthly savings recoup closing costs in a reasonable time.
Your credit score improved significantly — going from 640 to 760+ can qualify you for a substantially lower rate even if market rates haven't moved.
You want to switch loan types — ARM to fixed-rate; FHA (with lifetime MIP) to conventional (where MIP drops at 20% equity).
You want to shorten the term — refinancing from 30-year to 15-year increases monthly payments but dramatically reduces total interest paid and builds equity faster.
Cash-out refinance — if you have substantial equity and need funds for home improvement or high-interest debt payoff (though this resets the loan balance).

When refinancing doesn't make sense

You're close to paying off the loan — in the early years, most of your payment is interest; by year 20+, most is principal. Refinancing resets the amortization schedule, increasing total interest paid.
You plan to sell within 2–3 years — closing costs likely won't be recouped in time.
Your credit has declined — refinancing with worse credit than your original loan could mean a higher rate.
Closing costs are prohibitively high relative to savings — even a 1% rate reduction may not make sense if the loan balance is small.

Sources

Mortgage refinancing closing costs typically run 2–5% of the loan amount, including lender fees, title insurance, appraisal, and prepaid interest. — CFPB — Mortgage Refinancing
When refinancing from an FHA loan to a conventional loan after reaching 20% equity, borrowers can eliminate the annual MIP (mortgage insurance premium), which is charged for the life of most FHA loans originated after 2013. — HUD — FHA Mortgage Insurance
The average 30-year fixed mortgage rate fluctuated between 6.5% and 8% throughout 2023–2024, creating refinancing opportunities for borrowers who originated loans during the 2020–2021 low-rate period only as rates eventually decline. — Freddie Mac — Primary Mortgage Market Survey

Key takeaways

Calculate break-even: closing costs ÷ monthly savings = months to recoup. Only refinance if you'll stay past that date.
A rate drop of 0.75–1%+ generally makes refinancing worth modeling; 0.25–0.5% may not cover closing costs.
Refinancing FHA to conventional after reaching 20% equity eliminates lifetime MIP — often worth it.
Avoid refinancing near the end of your loan term — it resets amortization and increases total interest paid.
Get quotes from at least 3–5 lenders before refinancing; rates and fees vary meaningfully.

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