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What Banks Hide

How Banks Set Your Rate — And What They Don't Tell You

When Does Refinancing Make Sense?

Mortgage companies love to tell you it’s always a good time to refinance. It isn’t. Here’s how to know when it actually makes financial sense.

The Break-Even Rule

Refinancing costs money upfront (closing costs). It saves money monthly (lower payment). The break-even point is when cumulative savings exceed the upfront costs.

Break-even = Closing costs ÷ Monthly savings

If you plan to stay in the home past the break-even point, refinancing is likely worth it. If you’ll move before then, you’ll lose money.

The 1% Rule (and Why It’s Wrong)

You’ve probably heard “refinance if you can drop your rate by 1%.” This is a decent rule of thumb, but it ignores your specific situation:

  • Closing costs vary widely ($3,000 to $15,000+). High costs mean a longer break-even.
  • Your remaining balance matters. A 1% drop on $100,000 saves less than a 1% drop on $400,000.
  • Your remaining term matters. If you have 5 years left, refinancing into a new 30-year loan is usually foolish even with a lower rate.

When Refinancing Clearly Makes Sense

Rate drop of 1%+ with reasonable closing costs:

Example: $300,000 balance at 7.0%, current payment $1,996/mo.

Refinance to 5.5% on a 30-year: new payment ~$1,703/mo, saving $293/mo.

With $6,000 closing costs: break-even in 20 months. If you stay 5+ years, this is a clear win - you’ll save over $15,000.

Switching from ARM to fixed when rates are favorable. Locking in a low fixed rate removes future interest rate risk.

Shortening your term when you can afford the higher payment. Going from 30 to 15 years often comes with a rate discount and saves enormous interest.

When Refinancing Doesn’t Make Sense

  • You’ll move within 2-3 years. Unlikely to pass break-even.
  • You’ve paid down most of your loan. The savings shrink as the balance drops, and you’d restart the amortization clock.
  • The rate drop is small (<0.5%) and closing costs are high. Do the math - a 0.25% rate drop on $200,000 saves only ~$30/month. That’s a 10+ year break-even on $4,000 closing costs.
  • You’d be extending your term significantly. Going from 15 years remaining to a new 30-year loan means you’ll pay interest much longer.

The Hidden Cost: Resetting Amortization

This is what most people miss. Early in a mortgage, most of your payment goes to interest. As you pay down the balance, more goes to principal.

When you refinance into a new 30-year loan, you reset to the beginning - back to mostly-interest payments. Even with a lower rate, you might pay more total interest over the life of the loan.

The fix: If you refinance into a new 30-year loan, continue making your old (higher) payment. The difference goes to principal, and you get the best of both worlds.

Run Your Numbers

Don’t guess - calculate. Our Refinance Break-Even calculator shows you the exact month where refinancing pays for itself, plus total savings over your planned stay and over the life of the loan.

Already decided to keep your current mortgage? See how extra payments can save you thousands without any closing costs.

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Refinance Break-Even → Mortgage Early Payoff →