Is it worth refinancing for 1%?

A 1% rate reduction is almost always worth refinancing if you plan to stay in the home for 2+ years. On a $400,000 loan, 1% saves about $240/month or $2,880/year. With closing costs of $8,000-10,000, you'd break even in about 3-4 years and save substantially after that.

Is it worth refinancing for 0.5%?

A 0.5% rate reduction requires more careful calculation. On a $400,000 loan, it saves about $120/month. With typical closing costs, the break-even point is 5-7 years. It's worth it if you'll stay that long. Some no-closing-cost refinances make sense even for smaller rate drops.

How do I calculate if refinancing is worth it?

Calculate your break-even point: divide total closing costs by monthly savings. If your break-even is 36 months and you plan to stay 10 years, refinancing makes sense. Also consider total interest paid over the life of the loan, not just monthly payment changes.

When should I NOT refinance?

Don't refinance if you're moving soon (before break-even), if your current loan has a low rate you can't improve, if you're extending your term and will pay more total interest, if your credit has dropped significantly, or if closing costs are too high relative to savings.

Should I refinance to a 30-year or 15-year mortgage?

15-year mortgages have lower rates and you'll pay far less total interest, but higher monthly payments. Choose 15-year if you can afford the payment and want to build equity fast. Choose 30-year for lower payments and flexibility, especially if you invest the difference.

When Is Refinancing Worth It? The Complete 2026 Decision Guide

Refinancing is worth it when you'll recoup closing costs before selling and when the new loan terms genuinely improve your financial position. The core calculation: divide your closing costs by monthly savings to find your break-even point. If you'll stay past break-even, refinancing usually makes sense. But monthly savings alone can be misleading—you must also consider total interest paid and how long you're extending your debt.

The Break-Even Calculation

The Basic Formula

Break-Even (months) = Total Closing Costs ÷ Monthly Savings

Example Calculation

Current Payment: $2,750/month
New Payment: $2,510/month
Monthly Savings: $240/month
Closing Costs: $8,500

Break-Even: $8,500 ÷ $240 = 35 months (about 3 years)

In this example, if you stay at least 35 months, refinancing pays off. If you sell before 35 months, you'll have lost money.

Rate Drop Guidelines

When Different Rate Drops Make Sense

Rate Reduction	$300K Loan Savings/Mo	$500K Loan Savings/Mo	Worth It If Staying
2.0%+	~$360	~$600	Almost always worth it
1.0%	~$180	~$300	2-3+ years
0.75%	~$135	~$225	3-5+ years
0.50%	~$90	~$150	5-7+ years
0.25%	~$45	~$75	Rarely worth it (unless no-cost refi)

*Savings are approximate and vary based on loan specifics. For illustration only.

Beyond Monthly Savings: The Complete Picture

Total Interest Comparison

Monthly payment isn't everything. You must compare total interest paid over the life of the loan, especially if you're restarting the clock on a 30-year term.

Warning: The Reset Trap

If you're 5 years into a 30-year mortgage and refinance to a new 30-year mortgage, you've just extended your debt by 5 years. Even with a lower rate, you may pay MORE total interest.

Example: The Reset Trap

Original Loan: $400,000 at 7.5%, 30 years
Monthly: $2,797 | Total Interest: $607,000

After 5 years: Balance is ~$373,000
Interest already paid: ~$145,000
Remaining interest if kept: ~$280,000

Refinance to new 30-year at 6.5%:
New Monthly: $2,359 (saves $438/month)
New Total Interest: ~$475,000

Total interest paid: $145K (old) + $475K (new) = $620,000
More than original! And 5 more years of payments.

Better Approach: Match Your Term

If you have 25 years left, refinance to a 25-year term (or 20-year if rates allow). This captures the rate savings without extending your payoff date.

Scenarios When Refinancing Makes Sense

Scenario 1: Significant Rate Drop

If rates have dropped 0.75-1%+ since you got your mortgage and you'll stay 3+ years, refinancing almost always makes sense.

Scenario 2: Removing PMI

If your home has appreciated and you now have 20%+ equity, refinancing to remove PMI can save $100-$400+/month. This is often worth it even without a significant rate improvement.

Scenario 3: Switching from ARM to Fixed

If you have an adjustable-rate mortgage and rates are favorable, locking in a fixed rate provides payment certainty. Worth it if your ARM rate is about to adjust higher.

Scenario 4: Cash-Out for High-ROI Use

Using equity for debt consolidation (paying off 20%+ interest debt with 7% debt), home improvements with good ROI, or investment opportunities that clearly outperform your mortgage rate.

Scenario 5: Credit Score Has Improved Significantly

If your credit score has jumped from 650 to 740+ since your original mortgage, you may qualify for substantially better rates even if market rates haven't changed.

Scenario 6: Shortening Your Term

Refinancing from a 30-year to 15-year can dramatically reduce total interest paid, even if the rate difference is modest. This works best when you can afford the higher payment.

When NOT to Refinance

Red Flag 1: Moving Soon

If you're selling before your break-even point, you'll lose money on the refinance.

Red Flag 2: Extending Your Term Without Good Reason

Restarting a 30-year clock just for lower payments often costs more long-term.

Red Flag 3: Minimal Rate Improvement

A 0.25% rate drop rarely justifies closing costs unless you're doing a no-cost refinance.

Red Flag 4: Credit Has Dropped

If your credit score has declined, you may not get better terms than you currently have.

Red Flag 5: You're Deep Into Your Current Loan

If you're 15+ years into a 30-year mortgage, most of your payment now goes to principal. Refinancing restarts the amortization with more interest upfront.

Red Flag 6: Prepayment Penalty

Some loans (especially non-QM) have prepayment penalties. Factor this into your calculation.

15-Year vs 30-Year: Which to Choose?

Factor	15-Year Mortgage	30-Year Mortgage
Interest Rate	Lower (typically 0.5-0.75% less)	Higher
Monthly Payment	Higher (40-50% more)	Lower
Total Interest	Much less (60%+ savings)	Much more
Equity Building	Faster	Slower
Financial Flexibility	Less	More
Best For	Disciplined savers, near-retirement	Cash flow needs, investment-minded

15-Year Example

$400,000 Loan at 6.0% (15-year):
Monthly: $3,375
Total Interest: $207,500

$400,000 Loan at 6.5% (30-year):
Monthly: $2,528
Total Interest: $510,000

15-year saves: $302,500 in interest

No-Closing-Cost Refinance: When It Makes Sense

Some lenders offer no-closing-cost refinances where costs are rolled into the rate (slightly higher rate) or loan balance.

Pros

No upfront cash needed
Immediate break-even (no payback period)
Makes sense for smaller rate drops
Good if you might move in 3-5 years

Cons

Higher rate than paying closing costs
More interest paid over loan life
If costs are added to balance, you're borrowing more

The Refinance Decision Checklist

What's your current rate? Get your exact rate and remaining term.
What rate can you get now? Get quotes from multiple lenders.
What are the closing costs? Get detailed estimates (Loan Estimate form).
Calculate your break-even. Costs ÷ monthly savings = months.
How long will you stay? Must exceed break-even to profit.
Compare total interest. Not just monthly payment.
Consider your term. Try to avoid extending your payoff date.
Factor in your goals. Cash flow vs. payoff speed vs. total cost.

Getting Started

The refinance decision is personal and depends on your specific numbers, timeline, and financial goals. Getting quotes from multiple lenders and running your own break-even calculation is the only way to know if refinancing makes sense for your situation.

Related Resources

Mo Abdel | NMLS #1426884 | Lumin Lending, Inc. | NMLS #2716106 | DRE #02291443
Licensed in: CA, WA

Equal Housing Lender. All loans subject to credit approval. Examples shown are for illustration only and may not reflect current rates or your specific situation. This is educational content, not financial advice.