A refinance is selling your current loan to buy a new one. The new loan has a different rate, possibly a different term, and definitely closing costs. The math works when the savings from the new rate exceed the costs of the new loan over the time you'll hold it. The hard part is being honest about all three numbers.
The break-even formula
The single most useful refinance number is break-even months: how long it takes for the monthly savings to cover the closing costs.
Break-even = closing costs / monthly savings
Example: current loan at 7.0%, new loan at 5.75%, $340K balance, 30-year fixed. Old P&I: $2,261. New P&I: $1,984. Monthly savings: $277. Closing costs: $4,500. Break-even: 4,500 / 277 = 16 months.
If you'll be in the home longer than 16 months, the refinance saves money. If you'll move before then, it costs money. The simple calculation makes refinance economics clear.
What "closing costs" actually includes
Refinance closing costs typically run $2,500–$5,000 on a $300–$400K loan, depending on lender and state. The line items:
- Loan origination fee — usually 0.5–1% of loan amount, sometimes baked into rate
- Appraisal — $500–$700
- Title insurance and search — $400–$1,500 depending on state
- Recording fees — $100–$300
- Credit report, flood cert, tax service — $100–$300
- Attorney fees in attorney-required states — $500–$1,500
- Prepaids (interest from closing to month-end, escrow setup) — $1,000–$3,000, but these are not "costs" — they're prepaid amounts you'd owe anyway
The cost number that matters for break-even is true closing costs minus prepaids. Prepaids transfer money from your old escrow to your new escrow; they're not lost.
The "no-cost refinance" reality
Lenders advertise "no-cost refinances." The costs aren't gone — they're either rolled into the loan balance or rolled into the rate. A typical no-cost refinance has a rate 25–50 basis points higher than the par rate, in exchange for the lender absorbing closing costs.
Rules of thumb that mostly work
The 75-basis-point rule
If the new rate is at least 75 basis points (0.75%) below the current rate, the refinance usually pencils out at typical closing costs and typical hold times. Below 50 basis points, the math rarely works. Between 50 and 75, it depends on hold time and closing costs.
The 24-month rule
If your break-even is under 24 months and you'll definitely be in the home for at least that long, the refinance is rational. Over 36 months, you need to be confident about the hold.
The three refinance scenarios
Rate-and-term refinance
Same loan amount, lower rate, possibly different term. The classic refinance. Saves money over the new loan's life if break-even hits before sale or next refinance.
Cash-out refinance
New loan is larger than old loan; the difference is paid to borrower in cash. Useful for home improvements, debt consolidation, or other large expenses. Costs more in interest over the long run because the loan balance grows. Rate is usually 25–50 bps higher than rate-and-term refinance.
Cash-out refinance math: break-even isn't the right framework. The right framework is the cost of the cash extracted versus the cost of alternative borrowing. If you'd otherwise borrow at credit-card rates (20%+), refinancing into a 6% loan saves a lot. If you'd otherwise not borrow at all, the refinance is increasing your debt for liquidity that may or may not be productive.
Term-shortening refinance
Refinancing from 30-year to 15-year (or 20-year). Higher monthly payment, much lower lifetime interest, faster equity build. Works if monthly cash flow can absorb the higher payment without distress. Usually accompanied by a meaningful rate reduction (15-year rates run 50–75 bps below 30-year rates).
When refinancing is the wrong move
You're moving in 12 months
Closing costs won't be recovered. Stay with the existing loan and absorb the higher rate for the remaining months.
You're already deep into amortization
On a 30-year loan in year 22, you've already paid most of the interest you'll ever pay. Resetting the clock to a new 30-year loan extracts more interest over the new schedule even at a lower rate. The right refinance for late-amortization borrowers is term-matching: refinance into a 10-year or 15-year that ends close to the original loan's end.
The rate gap is small
A 25-basis-point reduction on $340K saves $50/month. After $4,000 in closing costs, the break-even is 80 months — almost 7 years. Few hold patterns make this rational.
Your credit or DTI has degraded
If your financial profile is weaker than it was at origination, the refinance may quote a rate that's not meaningfully better despite market conditions. Refinance into a worse profile-adjusted rate is usually a losing trade.
The 2022–2026 refinance environment
Most U.S. mortgages outstanding in 2026 carry rates between 3.0% and 6.5%, with a heavy concentration around 3.5–4.5% from the 2020–2021 wave. For these borrowers, refinance is generally not the right move at current rates — the existing rate is below market, and refinancing would increase the rate, not decrease it.
For borrowers who originated in 2022–2024 at rates 6.5–7.5%+, refinance opportunity emerges any time market rates drop 75+ basis points. As of mid-2026, rates have softened from the 2023 peak but not dramatically. Watch for moves below 6%, which would create a meaningful refinance opportunity for the post-2022 cohort.
The PMI-removal refinance
A specific case: refinancing from FHA to conventional to escape lifetime FHA MIP. This works when:
- Equity has reached 20% (through amortization, appreciation, or both)
- Conventional rates are within 25 bps of the existing FHA rate
- Credit and income support a clean conventional underwrite
The savings come from MIP elimination ($150–$240/month) rather than rate reduction. Break-even is usually fast (12–24 months) because the FHA MIP load is so heavy. This is one of the most cost-effective refinances most FHA borrowers can do.
The refinance checklist
- Get a Loan Estimate from at least 3 lenders for the same loan structure.
- Compare the APR (which includes most fees) more than the headline rate.
- Identify true closing costs (excluding prepaids).
- Calculate break-even months on your specific loan.
- Check your realistic hold horizon. Be honest. Most borrowers overestimate this.
- If break-even is under your hold horizon by a comfortable margin (say 50%+), refinance.
- If break-even is close to your horizon, the math is marginal — consider a no-cost option instead.
- If break-even exceeds your horizon, don't refinance.