Should I Refinance My Mortgage? The Break Even Test (2026)

The break even test

Refinancing is not free. You pay closing costs again, often 2 to 5 percent of the loan. A lower rate saves money every month, so the question is how many months of savings it takes to earn those costs back.

Break even months = closing costs ÷ monthly savings

Stay in the home past the break even month and the refinance pays off. Sell or refinance again before it, and you lost money on fees.

A worked example

Worked example: $300,000 balance, 27 years left

Old rate / payment7.25 percent / $2,113
New rate / payment6.25 percent / $1,919
Monthly savings$194
Closing costs$6,000
Break even point≈ 31 months

Here you recover the 6,000 dollars in about 31 months. If you plan to stay more than three years, the refinance is clearly worth it. If you might move within two years, it is not.

Watch the term reset

The monthly savings can be misleading if you restart the clock. Refinancing a loan with 23 years left into a fresh 30 year loan lowers the payment partly because you stretched it back out, which can raise total interest even at a lower rate. To compare fairly, refinance into a term close to what you had left, or keep the new lower payment but voluntarily pay the old amount so you finish on schedule and bank the rate savings.

Frequently asked questions

How much lower does the rate need to be to refinance?

There is no fixed threshold. The old rule of thumb was one percentage point, but what actually matters is whether the monthly savings recover your closing costs before you leave the loan. Run the break even test with your real numbers.

Does refinancing reset my loan term?

It can. A new 30 year loan restarts a 30 year clock even if you were years into the old one. That lowers the payment but can increase total interest. Choose a shorter new term, or keep paying the old amount, to avoid that trap.

What are typical refinance closing costs?

Usually 2 to 5 percent of the loan amount, covering the appraisal, title, lender, and prepaid items. Some lenders offer no closing cost refinances that fold the fees into a slightly higher rate, which changes the math.

Is a cash out refinance a good idea?

It depends on the use. Borrowing against your equity at mortgage rates can be cheaper than other debt, but it increases your balance and payment and puts your home on the line. Reserve it for high value uses, not routine spending.