The conventional wisdom on refinancing is “refi when you can drop your rate by 0.5% or more.” That’s a useful starting heuristic. It’s also, by itself, wrong often enough to cost people real money.
The actual question is simpler and harder: how long until the closing costs you pay today are recovered by the monthly savings? And: will you still own this loan past that point?
The break-even calc
Closing costs on a refinance run roughly 2–5% of the loan amount. On a $400,000 mortgage, that’s $8,000–$20,000 — paid up front (or rolled into the new loan, which just shifts where the cost lives).
Monthly savings is the new payment minus the old one. Drop the rate from 7.0% to 6.0% on a $400,000 30-year fixed, and you save about $260/month.
Break-even = closing costs ÷ monthly savings. In the example above: $12,000 ÷ $260 ≈ 46 months. About four years.
That’s the number that matters. If you’re staying in the home (and the loan) more than four years, the refi pays off. Less than four, you lose money on the trade.
What the rule of thumb misses
Three things the “0.5%” guideline doesn’t account for:
1. You’re resetting the clock. A 30-year refi after five years means you’re starting another 30. You’ll save on the monthly but pay more in total interest unless you refinance into a shorter term. Worth doing if the rate drop is large; worth thinking about if it’s marginal.
2. Your closing costs aren’t standardized. Lender fees, title fees, escrow, appraisal, points — these vary by 30%+ between lenders for the same loan. A refi that doesn’t pencil at one lender’s costs might at another’s. Shopping matters as much for refis as for purchases.
3. The break-even date is when you start making money. Most homeowners don’t sell or refinance again on the day they hit break-even. They cross that date and keep saving for years. The actual benefit is the monthly savings × every month you stay past break-even.
When the answer is no
Sometimes the math says no. Common cases:
- You’re planning to sell in the next two years
- The rate drop is under 0.5% and your closing costs are typical
- You’d be extending a loan you’re 25 years into (resetting to 30 makes the lifetime cost worse even with a lower rate)
Better moves in those situations: HELOC for cash needs (keeps your existing first-mortgage rate), or just wait.
The right framing
Refinancing isn’t a thing you do because rates dropped. It’s a thing you do because the math works for your timeline. Run the break-even. Compare it honestly against how long you’ll be in the loan. Decide from there.
If you want me to run the numbers on yours specifically, that’s free and takes about 10 minutes. The math is the math; I just put it in front of you.