The break-even rule
Refinancing costs thousands in closing costs to save hundreds a month. Divide the closing costs by the monthly saving: that is your break-even point. If you sell, move or pay off the loan before that month, refinancing loses money — no matter how good the new rate looks.
Worked example
A 280,000 balance at 7.5% with 25 years left costs about 2,069 a month. Refinancing to 6% over 30 years drops it to about 1,679 — a 390 monthly saving. With 6,000 closing costs, break-even is about 15 months. Stay longer than that and every month after is profit.
Watch the term trap
Restarting the clock to 30 years lowers the payment but can raise lifetime interest even at a lower rate. Compare total interest, not just the monthly figure — or refinance into a shorter term (say 20 years) to cut both the payment and the total cost.
Frequently asked questions
When is refinancing worth it?
Roughly when the rate drops at least 0.75 to 1%, closing costs break even well before you might sell, and you are not stretching the term without realising it.
How much are refinancing closing costs?
Typically 2 to 5% of the loan amount — lender fees, appraisal, title and prepaid items. Get a Loan Estimate to see yours.
Does refinancing hurt my credit?
A hard inquiry dings a few points temporarily; rate-shopping within a short window counts as one inquiry. The new loan can help utilisation long-term.
Can I refinance with bad credit?
It is harder and pricier. FHA streamline and VA IRRRL programs have lighter requirements if you already hold those loan types.