When Does It Make Sense to Refinance Your Mortgage?

Refinancing your mortgage means replacing your current home loan with a new one, usually to secure better terms, access equity, or adjust your payment structure. It can lead to big savings over time—but it also comes with upfront costs. Closing costs usually run 2–5% of the loan amount (about $4,000–$10,000 on a $200,000 loan), so the key question is whether the benefits outweigh the expenses.

To figure that out, you’ll want to run the numbers based on your financial situation and how long you plan to stay in the home. A refinance calculator is a great place to start.

When Refinancing Can Be a Smart Move

Here are the most common situations where refinancing might make sense:

1. Interest Rates Have Dropped

If current rates are at least 0.5–1% lower than what you’re paying now, refinancing often justifies the cost—especially if you have a high-rate loan.

Example: Dropping from 7% to 6% on a $300,000 30-year loan could save about $200 per month. If closing costs are $5,000, you’d break even in about 25 months.

Even a smaller reduction (0.25–0.75%) could work if fees are low and you’ll stay in the home long-term.

2. Your Credit Score Has Improved

If your score has jumped (say, from 680 to 740+), you may now qualify for better rates, even if market rates haven’t moved much.

3. You Want a Shorter Loan Term

Switching from a 30-year to a 15-year mortgage helps you build equity faster and saves a significant amount in total interest. Payments will be higher, but if you’re in your peak earning years and want to be debt-free by retirement, this can be a smart choice.

Example: On a $250,000 loan at 6%, moving to a 15-year loan could raise payments by $400 per month but save over $100,000 in interest.

4. You Want to Access Home Equity

A cash-out refinance lets you borrow against your home’s increased value. This can be used for debt consolidation, home improvements, or education costs. Be careful, though—don’t use it just to stretch out high-interest debt.

5. You Want to Switch Loan Types

Moving from an adjustable-rate mortgage (ARM) to a fixed-rate loan can protect you from future rate hikes.
Refinancing from an FHA or VA loan to a conventional mortgage may eliminate mortgage insurance premiums once you reach 20% equity.

6. Life Changes

Marriage, divorce, or removing a co-borrower can all require refinancing to update who is responsible for the loan.

How to Decide: The Break-Even Point

The most important factor is your break-even point—how long it takes to recover the costs of refinancing through monthly savings.

Formula:
Break-even months = Closing costs ÷ Monthly savings

Example: If closing costs are $6,000 and your refinance saves $250 per month, you’ll break even in 24 months. Staying in the home longer than that means you’ll come out ahead.

If your break-even timeline is longer than 3–5 years and you’re not sure how long you’ll stay in the home, refinancing may not be worth it.

When Refinancing May Not Be Worth It

You’re moving soon: If you plan to sell before breaking even, you won’t save money.
Rates haven’t dropped enough: A small rate reduction might not outweigh fees.
You’re extending your loan too far: Resetting the clock on a 30-year loan could mean paying more in total interest.
High fees eat up the savings: Sometimes costs outweigh the benefit, especially if you roll them into your new loan.

What to Do Next

Compare quotes from at least three lenders to find the best rate and fees.
Check your credit score and gather documents like pay stubs and tax returns.
Use an online refinance calculator to see how the numbers play out for your situation.

With mortgage rates in the 6–7% range in 2025 (down from recent peaks), refinancing can make sense if your current rate is 7% or higher and you plan to stay put.

Every homeowner’s situation is different, so consider talking with a financial advisor or reaching out to MMCCU for guidance tailored to your goals.