You've seen the headlines: "Mortgage rates drop to lowest in months!" Your first thought might be, "Should I refinance?" But here's the thing: lower rates don't automatically mean refinancing is the right move. Let's break down when refinancing makes sense and when it doesn't.
The Break-Even Calculation
This is the most important calculation you'll make. The break-even point is when your monthly savings equal your closing costs. Here's how to calculate it:
Break-Even Point = Total Closing Costs ÷ Monthly Savings
- Break-even = $6,000 ÷ $200 = 30 months
- If you plan to stay in the home longer than 30 months, refinancing makes sense
- If you're moving in 2 years, refinancing doesn't make sense
When Refinancing Makes Sense
1. You'll Stay in the Home Long Enough
This is the most critical factor. If you're planning to move before hitting your break-even point, refinancing will cost you money, not save it.
Rule of thumb: If you'll be in the home at least 2-3 years longer than your break-even point, refinancing is usually worth it.
2. You Can Lower Your Rate Significantly
A general rule is that you need at least a 0.5% to 1% rate reduction to make refinancing worthwhile. However, this depends on:
- Your current rate
- Your loan balance
- Your closing costs
- How long you'll stay in the home
Example: If you have a $400,000 loan and drop from 7% to 6%, you save about $240 per month. With $5,000 in closing costs, you break even in about 21 months.
3. You Want to Change Your Loan Term
Refinancing isn't just about rates. You might want to:
- Shorten your term: Go from 30 years to 15 years to pay off faster
- Lower your payment: Extend to 30 years to reduce monthly payments
- Switch loan types: Move from ARM to fixed for stability
4. You Need to Remove PMI
If your home has appreciated and you now have 20%+ equity, refinancing can remove PMI, saving you hundreds per month.
5. You Want to Access Equity (Cash-Out Refinance)
If you need cash for renovations, debt consolidation, or investments, a cash-out refinance lets you access your home's equity while potentially lowering your rate.
When Refinancing Doesn't Make Sense
1. You're Moving Soon
If you're planning to move within 2-3 years, closing costs will likely exceed your savings.
2. Your Rate Drop Is Too Small
If you're only saving $50-100 per month and closing costs are $5,000+, it might take 4-5 years to break even.
3. You've Already Refinanced Recently
If you refinanced in the last 12-18 months, you may not have enough time to recoup the costs again.
4. Your Credit Has Worsened
If your credit score has dropped significantly, you might not qualify for a better rate, or the rate might be worse than your current loan.
5. You're Close to Paying Off Your Loan
If you're 5-10 years into a 30-year loan, refinancing resets the clock. You might save monthly but pay more interest over time.
Types of Refinancing
[Rate & Term Refinance](/services/refinance/rate-term)
This is the most common type. You're simply getting a better rate or changing your loan term without taking cash out.
Best for: Homeowners who want to lower their rate or change their payment schedule.
[Cash-Out Refinance](/services/refinance/cash-out)
You refinance for more than you owe and take the difference in cash.
Best for: Homeowners who need cash and want to potentially lower their rate at the same time.
[Streamline Refinance](/services/refinance/streamline)
Simplified refinancing for FHA and VA loans with reduced documentation.
Best for: FHA and VA loan holders who want a quick, easy refinance.
The Math: A Real Example
- Current loan: $400,000 at 7% (30-year fixed)
- Current payment: $2,663 per month
- New rate: 6% (30-year fixed)
- New payment: $2,398 per month
- Monthly savings: $265
- Closing costs: $6,000
Break-even: $6,000 ÷ $265 = 23 months
5-year savings: $265 × 60 months = $15,900 - $6,000 = $9,900 saved
10-year savings: $265 × 120 months = $31,800 - $6,000 = $25,800 saved
If you plan to stay 5+ years, this refinance makes sense.
What to Consider Beyond the Math
1. Your Long-Term Goals
Are you planning to move? Retire? Pay off the mortgage early? Your goals affect whether refinancing makes sense.
2. Your Current Financial Situation
Can you afford the closing costs? Do you have the cash, or will you roll costs into the loan?
3. Market Conditions
Rates might drop further. But waiting could mean missing out on savings. There's no perfect time.
4. Your Loan Type
FHA and VA loans have streamline options that make refinancing easier and cheaper.
Steps to Take
1. Calculate your break-even point: Know exactly when you'll recoup costs 2. Get multiple quotes: Compare rates and closing costs from different lenders 3. Consider your timeline: Be honest about how long you'll stay in the home 4. Factor in all costs: Don't just look at the rate—include all fees 5. Work with a trusted lender: Someone who will help you understand if it makes sense
The Bottom Line
Refinancing can save you thousands, but it's not always the right move. The key is understanding your break-even point and being honest about your plans. If you'll stay in the home long enough to recoup costs and then some, refinancing is usually worth it.
At Enzo Maldini, we help Orange County homeowners make informed refinancing decisions. We'll calculate your break-even point, explain all your options, and help you decide if refinancing makes sense for your situation.
Ready to see if refinancing makes sense for you? Check your refinance options, explore our refinance landing page, or get pre-approved to see your rate.