Refinancing makes sense when the money you save each month pays back the closing costs before you sell or refinance again. Divide the closing costs by the monthly savings to get your break-even point in months. If you’ll keep the loan longer than that, the refinance pays off.
Example: you owe $340,000 at 8.00% with 27 years left, so your principal and interest payment is $2,565. A new 30-year loan at 7.32% drops it to $2,336, saving $229 a month. With $8,500 in closing costs, you break even in 37 months. But restarting the clock at 30 years means paying interest for three extra years, and that changes the math.
Key takeaways
- Break-even in months = closing costs ÷ monthly savings. Under 36 months is usually a good refinance.
- The old “1% lower rate” rule is a rough guide. On a large loan, a smaller drop can still pay off.
- A new 30-year term lowers your payment but can raise your total interest. Compare total cost over the years you’ll keep the loan.
- FHA Streamline and VA IRRRL refinances skip most paperwork but require at least 210 days and six payments on your current loan.
In this guide: Break-even math · Same term vs. new 30 years · Good reasons to refinance · Refinance types · Requirements · FAQ
How to calculate your refinance break-even point
- Find your current principal and interest payment on your mortgage statement. Leave out taxes and insurance, which don’t change.
- Get a new payment from a Loan Estimate for the refinance.
- Subtract to get your monthly savings.
- Divide the total closing costs on the Loan Estimate by the monthly savings.
| Current loan | Refinance, new 30 years | Refinance, 27-year term | |
|---|---|---|---|
| Balance | $340,000 | $340,000 | $340,000 |
| Rate | 8.00% | 7.32% | 7.32% |
| Months left | 324 | 360 | 324 |
| Principal and interest | $2,565 | $2,336 | $2,410 |
| Monthly savings | – | $229 | $155 |
| Break-even with $8,500 in costs | – | 37 months | 55 months |
| Interest still to pay | $490,915 | $500,803 | $440,824 |
Refinance costs typically run 2% to 5% of the loan amount. Some lenders let you skip upfront costs in exchange for a higher rate, which can make sense if you’re not sure how long you’ll stay.
Same term or a new 30 years?
The table shows a trap. The new 30-year loan has the bigger monthly savings and the faster break-even, but you’d pay about $9,900 more interest over the life of the loan than if you just kept your current mortgage, because you’d be paying for three more years.
Choosing a 27-year term, or making the same payment you make today on the new loan, gives you a smaller monthly saving but cuts total interest by about $50,000. If your goal is cash flow, the 30-year term is fine. If it’s total cost, match your remaining term or pay extra. See how extra payments shorten your loan in our guide to paying off your mortgage early.
Refinance Payment Calculator: Test a New Rate
Full guide: mortgage payment calculator with taxes, insurance and PMI
Your full monthly payment: principal, interest, property tax, homeowners insurance, PMI or FHA mortgage insurance, and HOA dues.
Loan balance and what you pay over time
Each year’s principal and interest, and the balance left at year end.
Year-by-year amortization table
| Year | Principal | Interest | Balance |
|---|
Good reasons to refinance
- A lower rate that breaks even well before you plan to move.
- Removing mortgage insurance. If your home has gained value, refinancing an FHA loan into a conventional loan with at least 20% equity drops MIP for good. With a conventional loan, you can often remove PMI without refinancing.
- Switching from an adjustable rate to a fixed rate before the ARM resets. Our guide to fixed vs. adjustable-rate mortgages shows how much a reset can add.
- Shortening your term to a 15-year loan if you can afford the higher payment. Compare both in our 15-year vs. 30-year guide.
- Taking cash out for a major expense, if the new rate isn’t much higher than the old one.
Types of refinance
| Type | What it does | Watch for |
|---|---|---|
| Rate-and-term | Changes the rate, the term, or both | Closing costs and resetting the term |
| Cash-out | Borrows more than you owe and pays you the difference | Usually limited to 80% of the home’s value on conventional and FHA loans |
| FHA Streamline | Lowers the rate on an FHA loan with little paperwork, usually no appraisal | Must show a net benefit to you; MIP continues |
| VA IRRRL | Lowers the rate on a VA loan, often with no appraisal | Fee of 0.5% of the loan; costs must be recouped within 36 months |
| Rate reduction with points | Pays upfront to buy a lower rate | Longer break-even; see our mortgage points guide |
Refinance requirements
- Equity: most lenders want at least 5% equity for a rate-and-term conventional refinance and 20% for cash-out. Streamline programs may not need an appraisal at all.
- Credit: 620 or higher for most conventional refinances, and higher scores get better rates. Our guide on credit scores shows how much your score changes the cost.
- Debt-to-income ratio: usually 43% to 50% or less. Check yours with our DTI calculator.
- Seasoning: FHA Streamline and VA IRRRL loans need at least 210 days since your first payment and six on-time payments. Conventional cash-out refinances generally require you to have owned the home for at least 12 months.
Frequently asked questions
How much lower should my rate be to refinance?
There’s no fixed number. On a $340,000 loan, cutting the rate by 0.68 points saves about $229 a month, which pays back $8,500 in costs in about three years. On a $100,000 loan, the same drop saves about $67 a month, so even $5,000 in costs takes more than six years to recover.
How soon can I refinance after buying?
Many conventional rate-and-term refinances have no waiting period. FHA Streamline and VA IRRRL loans need 210 days and six payments, and cash-out usually needs 12 months.
Does refinancing hurt your credit?
The credit check causes a small, temporary dip. Rate shopping within a short window, usually 14 to 45 days depending on the scoring model, counts as a single inquiry.
Should I refinance if I plan to move in two years?
Usually not, unless the break-even is shorter than two years or the lender covers the closing costs with a credit.
The bottom line
Run the break-even, then compare total interest over the years you’ll realistically keep the loan. A refinance that pays off in under three years and doesn’t stretch your term is usually a good deal.
Estimates only. HomeAffordLab is not a lender and does not provide financial advice. This page may contain ads. See our Advertising Disclosure.
Sources: Freddie Mac Primary Mortgage Market Survey, Oct 22, 2026 · CFPB: Refinancing guide · HUD Handbook 4000.1, Streamline refinance · VA: Interest Rate Reduction Refinance Loan · Fannie Mae Selling Guide B2-1.3 (refinance transactions)