The old rule was simple: refinance when you can drop your rate by at least 1%. That guidance made sense when closing costs were minimal, but today's reality is more complex. With typical refinancing costs running $3,000-$6,000, you need to do the math on your specific situation.
The break-even calculation is straightforward but crucial. Take your monthly savings and divide it into your total closing costs. If refinancing saves you $200/month and costs $4,000, you'll break even in 20 months. Planning to stay in your home longer than that? Refinancing probably makes sense. Thinking about moving in the next year or two? The numbers don't work.
| Situation | Refinance Makes Sense? |
|---|---|
| Rate drop of 0.5%+ AND staying 3+ years | Yes - clear savings |
| Switching from ARM to fixed rate | Yes - stability worth premium |
| Removing PMI after reaching 20% equity | Yes - immediate savings |
| Cash-out refi to pay off 20%+ credit cards | Yes - but fix spending first |
| Moving or selling within 2 years | No - won't recoup costs |
Removing PMI is one of the most overlooked refinancing triggers. If you've crossed the 20% equity threshold since buying your home - either through payments or appreciation - refinancing to eliminate PMI can save $100-$300 monthly. In this scenario, even a rate that's only slightly better can make refinancing worthwhile.
The hidden benefit of refinancing is the ability to restructure your debt strategically. Converting high-interest debt into low-interest mortgage debt can be smart - but only if you address the underlying spending patterns that created the debt in the first place. Otherwise, you're just resetting the clock on a problem that will resurface.
Get quotes from at least three lenders before committing. Rates and fees vary dramatically, and competition has increased as lenders fight for business. Online lenders often beat traditional banks on both rates and closing costs. The difference between the best and worst offer can easily exceed $1,000 in fees and thousands more in interest over the loan term.