When Should You Refinance Your Mortgage?

Refinancing replaces your current mortgage with a new one — ideally at a better rate or different term. But refinancing isn't always a smart move. Here's how to decide.

The 1% Rule (and Why It's Outdated)

Old advice said to refinance if you could lower your rate by 1%. Today, a better approach is to calculate your specific break-even point, since closing costs vary widely.

Calculate Your Break-Even Point

Refinancing costs money — typically $3,000 to $6,000 in closing costs. Your break-even is how long it takes your monthly savings to offset those costs.

Good Reasons to Refinance

• Rates have dropped 0.5–1%+ below your current rate
• Your credit score has improved significantly since your original loan
• You want to switch from ARM to fixed (stability)
• You want to shorten your term (30 → 15 year)
• You want to tap home equity (cash-out refinance)

Bad Reasons to Refinance

• You're late in your loan term (most interest is paid early)
• You'll move before the break-even point
• You're extending the term just to lower payments (costs more long-term)
• You're using cash-out for non-essential spending

The Current Rate Environment

Refinancing volume surges when rates drop. Watch rates regularly, and when they fall meaningfully below your current rate, get quotes from at least 3 lenders.