Should You Refinance? Here's How to Actually Run the Numbers
A step-by-step walkthrough for deciding whether refinancing your mortgage is worth it, including the break-even calculation most people skip.
"Rates dropped, should I refinance?" almost always needs a second question answered first: how long until the refinance actually pays for itself?
Step 1: compare the two payments directly
Say you have a $280,000 remaining balance, currently paying $1,900/month, and a new loan offer at 5.75% over 30 years. Running the amortization formula on the new terms gives a payment of roughly $1,634/month — a monthly savings of about $266, or roughly $3,192 per year.
Step 2: don't stop at monthly savings — find the break-even point
Refinancing isn't free. Closing costs (appraisal, origination fees, title work) commonly run $3,000-$6,000. Applying the same break-even logic used elsewhere on this site (fixed cost divided by savings per period): at $266/month saved and, say, $4,000 in closing costs, break-even arrives in 4,000/266 ≈ 15 months. If you're confident you'll stay in the home well beyond 15 months, the refinance clears its own cost with room to spare.
Step 3: watch out for resetting the clock
Refinancing into a new 30-year term restarts amortization from scratch — even though you might have already paid down several years of your original loan, the new loan's early payments will again be interest-heavy. Refinancing into a shorter remaining term (like 20 or 25 years) at a similar payment level avoids silently extending your total payoff timeline.
Step 4: consider whether a smaller rate drop is still worth it
A common rule of thumb suggests refinancing becomes worth investigating once rates drop at least 0.5-1 percentage point below your current rate, though the real answer depends entirely on your specific break-even math from step 2, not a fixed threshold. A smaller rate drop with very low closing costs can still break even quickly; a larger drop with high closing costs might not.
The full decision in one pass
Monthly savings tells you the size of the benefit; break-even tells you when that benefit starts actually paying off; your expected time remaining in the home tells you whether you'll ever collect on it. Skipping any one of the three leaves a real gap in the decision.
Run your own comparison with the refinance calculator, mortgage calculator, and break-even calculator.