When Should You Refinance?
The old rule about waiting for a rate drop of a certain size is not useful. The real question is your breakeven point and how long you will keep the loan.
Fact-checked and reviewed for financial accuracy by Priya Kannan, CFP®. Read our content review process.
A refinance replaces your existing mortgage with a new one. It costs money to do — commonly 2 to 5 percent of the loan amount — so the question is always whether the monthly saving recovers that cost before you sell or refinance again.
The breakeven calculation
Divide your total refinance costs by your monthly savings. The result is how many months it takes to break even.
Watch the term reset
Refinancing a loan you have paid for seven years into a fresh 30-year term lowers the payment partly because you restarted the clock. You may pay more total interest even at a lower rate. Compare against refinancing into the remaining term — a 23-year or 20-year loan — which captures the rate improvement without extending the payoff date.
When refinancing usually makes sense
- The breakeven is comfortably shorter than how long you expect to stay
- You are removing mortgage insurance you can no longer cancel any other way, such as on an FHA loan
- You are converting an adjustable rate to a fixed rate before it adjusts
- You can shorten the term meaningfully — 30 years to 15 — and afford the payment
- You are removing a co-borrower after a divorce or separation
When it usually does not
- You may move within the breakeven window
- You are late in a loan term and would restart amortization
- Your credit or income has deteriorated since the original loan, which will price the new one worse
- The savings depend on rolling costs into the balance you did not otherwise want to increase
Cash-out refinancing
A cash-out refinance replaces your mortgage with a larger one and pays you the difference. It typically prices slightly higher than a rate-and-term refinance and usually requires you to retain 20 percent equity. It is worth comparing directly against a HELOC or home equity loan — if your existing first mortgage carries a low rate, giving it up to access equity is often the most expensive option available.
"No-cost" refinancing
There is no such thing as free. A no-cost refinance means the lender covers closing costs in exchange for a higher rate, or rolls them into the balance. It can be sensible when you expect to refinance again soon, or when you lack cash. Ask for a side-by-side comparison of both structures over five years.
What the process requires
- A new credit pull, income documentation, and asset verification
- An appraisal in most cases, though some loans qualify for a waiver
- A new title search and lender's title policy
- A three-business-day right of rescission on a primary residence refinance
- Thirty to forty-five days from application to closing, typically
Frequently asked questions
How much lower does the rate need to be to refinance?
There is no universal threshold. What matters is whether your breakeven period is shorter than your expected time in the loan. On a large balance, even a modest reduction can break even quickly.
How often can I refinance?
There is no legal limit, though some loans carry a seasoning requirement of six months to a year, and each refinance carries costs.
Does refinancing hurt my credit?
A hard inquiry and a new account cause a small temporary dip. The effect is minor and typically recovers within months.
Editorial note. This article is educational and is not financial, tax, or legal advice. Loan terms, rates, insurance costs, and tax rules vary by lender, state, and individual circumstance. Figures shown are illustrative. Confirm details with a licensed lender, tax professional, or attorney before making a decision.
