You've probably heard the old rule: don't refinance unless the rate drops a full percentage point. It's a relic. The real test takes one division problem and answers the question for your actual situation, not a rule of thumb from another decade.

The method

Three numbers decide everything:

  • Your monthly savings: the difference between your current principal-and-interest payment and the new one.
  • Your total closing costs: everything it costs to do the refinance.
  • Your break-even point: closing costs divided by monthly savings. That's the number of months until the refinance has paid for itself.

Then one honest question: will you still have this loan at break-even? If you'll clearly keep the home and the loan well past that month, the refinance makes you money. If you might sell or refinance again before it, the refinance costs you money, no matter how satisfying the lower payment feels.

Both calculations are on our calculators page, no contact information required.

Why the one-percent rule misleads

The rule ignores loan size and cost structure, the two things that actually drive the math. On a large balance, even a modest rate drop creates real monthly savings, so break-even can arrive fast. On a small balance, even a big rate drop may not cover the costs for years. And streamline programs with reduced costs, like the FHA Streamline and VA IRRRL, shift the math further, because lower costs mean earlier break-even at the same rate reduction.

The term-reset trap

Here's where refinances quietly go wrong. If you're five years into a 30-year loan and refinance into a fresh 30-year term, you've stretched your remaining 25 years of debt across 30. The payment falls partly because of the better rate and partly because you added five years of interest. The fix is simple: when comparing, price the new loan at a term close to what you have left, say 25 years, or compare total remaining interest, not just the monthly payment. An honest lender will show you both; our calculator lets you set the term for exactly this reason.

The three-question summary: What do I save per month? How many months to break even? Will I keep the loan that long? If all three answers are solid, the refinance deserves a serious look.

Beyond the payment

Break-even math covers the rate-and-term decision, but sometimes refinancing serves a different job: removing mortgage insurance, moving off an adjustable rate before it resets, or consolidating debt through cash-out. Those cases have their own math, which their guides cover.

Educational content, not an offer or extension of credit, and not advice for your specific situation. Whether refinancing benefits you depends on your full financial picture.