Refinancing your mortgage means replacing your current loan with a new one, typically at a lower interest rate. The decision comes down to one core calculation: how long until your monthly savings exceed your closing costs?

The Break-Even Calculation

Break-even months = Closing costs ÷ Monthly payment reduction

Example: $6,000 closing costs ÷ $200 monthly savings = 30 months (2.5 years) to break even. If you plan to stay in the home longer than 30 months, refinancing likely makes sense.

The 1% Rule: A Starting Point, Not a Rule

You may have heard "only refinance if you can lower your rate by at least 1%." This is a crude heuristic that ignores your loan balance, closing costs, and remaining term. A $600,000 mortgage benefits far more from a 0.5% rate reduction than a $150,000 mortgage benefits from a 1% reduction. Use the break-even calculation, not the 1% rule.

Factors That Improve the Refinance Case

  • Large loan balance: A 0.5% rate reduction saves more in dollar terms on a $500,000 loan than a 2% reduction on a $100,000 loan
  • Long remaining term: More years of savings ahead means a faster break-even
  • Low closing costs: Some lenders offer no-closing-cost refinances (the costs are rolled into a slightly higher rate)
  • Improved credit score: If your score has risen since origination, you may qualify for better rates

Cash-Out Refinance vs Rate-and-Term Refinance

A rate-and-term refinance simply replaces your current loan with a lower-rate equivalent — the focus of this article. A cash-out refinance replaces your loan with a larger one and gives you the difference in cash, typically to fund home improvements or consolidate debt. Cash-out refinances carry more risk: you're increasing your debt and resetting your amortisation schedule. Only consider it for high-return uses (home renovations that add more value than they cost, or consolidating very high-rate debt).

When Refinancing Doesn't Make Sense

  • You plan to sell within the break-even period
  • You have fewer than 5 years left on your mortgage (most of your payments are now principal, not interest)
  • Extending your term by resetting to a 30-year loan defeats the savings
  • Your credit has deteriorated since your original loan

Use the WealthSerene Refinance Analyzer to model your specific numbers — break-even month, monthly savings, and lifetime interest comparison.