Should I refinance?

It comes down to three things: how much the payment drops, what the refinance costs, and how long you will stay. If it takes 30 months to recover your closing costs and you expect to move in two years, it does not pay off. This calculator shows your breakeven point and what happens if you leave before reaching it.

The old rule of thumb was 1%, but that was never really the right test. What matters is the breakeven: your closing costs divided by your monthly saving. A small rate drop on a large balance can be worth it, and a large drop on a small balance may not be. Enter your numbers rather than relying on a rule.

Divide what you pay out of pocket by what you save each month. If closing costs are $6,000 and you save $200 a month, you break even in 30 months. If you finance the costs instead of paying cash, there is no outlay to recover — but the costs are added to your balance and you pay interest on them for the life of the loan.

Be careful here. If you are eight years into a 30-year mortgage and refinance into a fresh 30-year term, the payment falls partly because you are stretching the remaining balance over 38 total years. That can increase your total interest substantially even though the monthly number looks better. This calculator shows the total interest for both loans so you can see the trade-off, and flags it when the new term is longer than what you have left.

Sometimes the costs can be covered by the lender in exchange for a slightly higher rate, which makes the breakeven immediate. That is often the better structure for people who may move or refinance again within a few years. The right answer depends on your timeline, which is the first question worth asking.