Many people refinance their mortgages to lower their monthly payment, but it’s not the right move for every homeowner.
That’s because refinancing comes with costs, and whether those costs are worth it depends heavily on the interest rate you get, the loan term you choose, the monthly savings your refinance will net you, and several other factors.
To ensure you’re making the right financial decision, understanding your refinance’s break-even point, or the point at which the refinance saves you more than it costs, is critical. Here’s how to calculate your break-even point and when a refinance may (or may not) make sense for your household.
How Refinancing Lowers Your Monthly Payment
Two ways refinancing your mortgage can reduce your monthly payment: A lower interest rate or a longer loan term. Learn more about how each of these methods works below.
Refinancing into a lower interest rate
If you can secure a lower interest rate than what is on your current loan, it directly lowers your monthly payment and your long-term interest costs. With a $300,000 loan at a 7.5% interest rate, for example, you’d have a principal and interest payment of about $2,098 per month. If you could refinance into a 6.5% rate, that payment would drop to about $1,896, saving you roughly $200 per month or $2,400 per year.
Take note, though: Getting a lower interest rate depends on a lot of factors. Current market conditions, the lender you choose, and your credit score, debts, income, and existing loan balance will all play a role. Generally speaking, though, if you can secure even a 75-point reduction in your rate, it can produce meaningful savings. (Even smaller ones can be effective on higher loan amounts.)
Refinancing into a longer loan term
If you can’t get a lower interest rate, you can also reduce your monthly payment by refinancing into a longer loan term. This works by spreading your remaining loan balance out over a longer period. For instance, if you started with that $2,098 payment, but refinanced into a new 30-year loan once your balance dropped to $200,000, you could secure a monthly payment of just $1,398, even at that same 7.5% interest rate.
In some cases, you may be able to combine both of these tools, a lower rate and a longer loan term. Doing this would net you an even larger monthly payment reduction. In the above example, if you refinanced that $200,000 balance into a 6.5% rate 30-year loan, your payment would fall to just $1,264.
However, it is worth keeping in mind that one ramification of refinancing into a longer loan term is that it may result in higher finance charges over the life of the loan.
The Break-Even Point: Your Most Important Number
If you’re considering a refinance, your break-even point should always be top of mind.
To put it simply, the break-even point is the month in which you will “break even” on your refinance’s closing costs. To calculate it, you just need two numbers:
- The total closing costs for your refinance
- How much the refinance will save you each month
You’ll then divide the closing costs by the savings, and that will tell you when you’d break even on that specific refinancing scenario.
Here’s a look at how that would look in action: Let’s say you were considering refinancing a $300,000 loan balance. The refinance would reduce your monthly payment by $200 per month, and your closing costs would be $6,000. (Closing costs generally amount to about 2% to 5% of the loan amount, industry averages show, but your lender can give you a more exact estimate of closing costs for your specific case.)
To calculate the break-even point in the above scenario, you’d take that $6,000 in closing costs and divide it by your $200 monthly savings to get 30. That means you’d break even on your closing costs in 30 months, or 2.5 years. If you know you’ll be in the home for 30 months and can reap the full benefits of refinancing, then it’s probably a smart move. If you won’t or you’re just not sure about your timeline, a refinance could end up costing you more than it saves you in the long run.
Often, it’s easiest to use an online refinance break-even calculator to run these numbers. A mortgage professional can also help you do the calculations if you want more hands-on help.
When Refinancing to Lower Your Payment Does Not Make Sense
Having a good handle on your long-term plans as a homeowner is important if you’re eyeing a refinance. While the typical homeowner stays put for somewhere between eight and 13 years, every person is different. And if you don’t think you’ll reach the break-even point in your refinance, it means the loan could cost you more than it saves you.
Of course, it’s not always possible to predict when you’ll need to move house. Job changes, family needs, and other factors can all play a role. But as a general rule, most financial professionals recommend refinancing only if your break-even point will be 24 months or less. Beyond the 36-month point, you’ll want to think very carefully before moving forward with a refinance.
The timing of your refinance can play in, too, of course. If rates are trending downward or your credit score is improving, and you may be able to secure a notably lower interest rate a few months down the road, it may be worth waiting it out to refinance. This would allow you to increase your monthly savings and, as a result, move up the break-even point. (For example, if refinancing now would only net you $75 in monthly savings today, you wouldn’t break even on $6,000 in closing costs for over six years. If you could lower your rate and increase those savings to $100 in a few months, though, it’s possible to shave years off your break-even point.)
A quick note: While it’s possible to refinance several times, something you might do if mortgage rates trend downward for a while, it’s important to remember that this extends your break-even point every time. It will also reset your loan term and payoff timeline. That math rarely works in the borrower’s favor.
The Term Decision: Short-Term Savings vs. Long-Term Cost
As mentioned above, refinancing resets your loan term. This not only extends your final payoff timeline but also changes the total long-term interest costs of your loan.
For example, if you’re eight years into a 30-year mortgage and then refinance, it will technically be a total of 38 years until you pay off your house. That’s 38 years of paying interest and, even with a reduction in your interest rate (if you can get one), could significantly increase what your home costs you in the long run. See the example below for a good visual:
| Loan amount | Interest rate | Loan term | Monthly payment | Interest paid | |
| Original loan | $300,000 | 7.5% | 30 years | $2,098 | $172,188.56 (after eight years) |
| Refinance loan | $265,805 | 6.5% | 30 years | $1,680 | $339,019.63 |
| Total | $511,208.19 |
In the scenario above, keeping the original loan would have only cost you $455,151.67 in total interest if you’d stuck with it over the full loan term. That’s a savings of almost $60,000.
One option to avoid this conundrum is to choose a shorter-term loan when you refinance. This wouldn’t give you the lowest possible monthly payment, like a 30-year loan would. But it would minimize the interest you pay and keep you closer to your original interest costs — or even under them.
You can also opt for a loan term that’s somewhere around the years you have left on your current loan. For example, if you have 22 years left on your 30-year loan, opting for a 20-year refinance could be a smart move. Here’s how the above scenario would look if you refinanced into a 20-year loan instead of a 30-year one. Keep in mind that loans with shorter terms tend to have lower interest rates as well.
| Loan amount | Interest rate | Loan term | Monthly payment | Interest paid | |
| Original loan | $300,000 | 7.5% | 30 years | $2,098 | 4172,188.56 (after eight years) |
| Refinance loan | $265,805 | 6.5% | 20 years | $1,904 | $191,229.30 |
| Total | $363,417.86 |
As you can see above, the 20-year refinance would mean a higher monthly payment (though still lower than your original one), but it would save you almost $150,000 in long-term interest and keep you closer to your original payoff timeline.
If the higher monthly payment on that 20-year loan isn’t ideal, another option is to refinance into the previous, 30-year option, but commit to making extra payments toward the loan whenever possible. That might mean putting your annual tax refund or holiday bonus toward the loan, or even adding an extra $100 to your principal payment each month. This would help you pay off the loan faster and reduce your long-term interest costs, while still retaining cash flow.
How Mortgage Rates Work and Why Timing Matters
There’s a lot that goes into mortgage rates. While the 10-year Treasury yield is their primary benchmark, the lender you choose and their specific margins, appetite for risk, need for business, and other elements play a role, too.
The loan type and term you opt for and your individual financial characteristics, things like your credit score, loan-to-value ratio (LTV), and debt-to-income ratio (DTI), also matter. (Generally speaking, the lower your credit score, DTI, and LTV are, the better rate you’ll get.)
There’s also a timing element. Mortgage rates are always moving, and the rate you’re quoted today could be different from the one you’re quoted tomorrow or a month or two down the line. While timing your refinance perfectly to align with the lowest rates is near impossible, there are a few things you can do to ensure the numbers work in your favor. You can:
- Know your credit score. If you’re on the cusp of moving into a new credit score threshold (670, 740, 780, etc.), you may want to wait until your score improves. This could qualify you for a lower interest rate.’
- Get quotes from multiple lenders and types of lenders. Rates can vary widely between mortgage companies. Getting quotes from several banks, credit unions, and online lenders can ensure you see the best rates.
- Secure your quotes on the same day. This not only minimizes the impact of your applications on your credit score but also ensures you’re getting quotes under the same market conditions.
Finally, once you get a rate and closing-cost quote that works within your budget and provides a break-even timeline that aligns with your goals, you can lock in your rate. This gives you 30 to 60 days, depending on the lender, to finalize your loan without risking any rate changes.
What About No-Cost Refinances?
Some lenders market “no-cost” refinance loans. And while those can sound tempting, they’re not really free.
With “no-cost” refinances, the lender doesn’t waive your closing costs entirely. Instead, they either roll them into your loan balance or charge you a higher interest rate. Either way, it means that not only are you still paying them, but you’re paying interest on them, too. (And in the case of a higher interest rate, it actually means paying more on your entire loan balance.)
That’s not to say there’s no scenario in which a no-cost refinance would make sense. You’ll just need to run the numbers. In a situation where you could secure a much lower interest rate, for example, a no-cost refinance may still lower your payment enough to work in your favor long-term. If you plan to sell the house or refinance again in a few years, it also might work out, as you’d avoid paying that higher interest rate for an extended period of time.
In general, though, if you’re planning to stay in your home for the long haul, paying your closing costs upfront is almost always the cheaper option.
Other Ways to Lower Your Payment Without Refinancing
Refinancing isn’t the only option if you need a lower mortgage payment. If you can’t qualify for a refinance that works for your budget or you won’t reach the break-even point on one, several other strategies can help.
You could:
- Recast your mortgage. This is when you make a large lump-sum payment toward your mortgage, and your lender recalculates your payments based on the new, reduced balance. This doesn’t change your loan’s rate or term and usually comes with a small fee, but it will reduce your payment. You’ll need to talk to your lender about this option, though, as not all companies offer it.
- Remove your PMI. If you’ve been paying for Private Mortgage Insurance (PMI), it has likely added quite a bit to your monthly payments. But once you reach 20% equity in your home (meaning your loan balance is 80% or less than your home’s value), you can request that your lender cancel PMI. This often reduces your monthly payment by $100 or more.
- Shop around for your home insurance. Most homeowners pay escrow, which means a portion of their monthly mortgage payments goes toward home insurance premiums. If this is the case with your loan, you may be able to lower your monthly payments simply by changing your insurer or insurance policy.
- Appeal your property taxes. Property taxes are another escrow cost. If you can appeal your property tax assessment and reduce what you owe for your home’s annual taxes, you may be able to pay less per month in escrow costs.
If you’re having a true financial hardship and are unable to make your mortgage payment, you can contact your lender and ask about options. They may allow you to apply for forbearance or deferral, which temporarily pauses your mortgage payments while you get back on your feet. Other options may be available, too.
When Refinancing Serves a Different Purpose
While refinancing can reduce your monthly payment, that’s not the only reason you might want to do it.
You may also consider refinancing to:
- Take cash out of your home. Cash-out refinances allow you to take cash out of your home’s equity. They work by replacing your current mortgage loan with a larger one. The new loan then pays off the old one, and you get the difference between those two balances in cash.
- Change loan types. You might also refinance to get a different loan type. For example, if you have an FHA loan, you may want to refinance into a conventional loan to remove the FHA Mortgage Insurance Premium (MIP), which often lasts for the entire loan term. You might also consider refinancing into a fixed-rate loan if you currently have an adjustable-rate loan. This would help you avoid potential interest rate increases down the line.
- Remove a co-borrower or buy out a former spouse. Refinancing can also help you if you’re separating from a former spouse or co-borrower and want to be the sole name on the mortgage.
In the above scenarios, the break-even point wouldn’t be a factor, as the savings are not your primary aim with the refinance. In these cases, you’d want to ensure the numbers work for your budget and that the refinance serves your ultimate financial goal. You may want to talk to a mortgage professional to be sure.
Frequently Asked Questions (FAQs)
Does Refinancing Always Lower Your Monthly Payment?
Refinancing your mortgage loan won’t always reduce your monthly payment. To get a lower monthly payment, you would need to refinance into a longer-term loan, qualify for a lower mortgage rate, or both. If you refinance into a loan with a shorter term, your monthly payment typically increases.
How Much Lower Does My Rate Need to Be to Make Refinancing Worth It?
There is no universal rule, but many financial professionals cite a 0.75% to 1% rate reduction as a general threshold for refinancing. Smaller rate reductions can also be effective, though, especially on larger-balance loans. The best approach is to calculate the refinance’s break-even point, or the point at which you would break even on the loan’s closing costs, and compare that to how long you plan to stay in the home.
How Much Can Refinancing Lower My Monthly Payment?
The exact payment reduction depends on your current loan balance and interest rate, as well as the new rate and term you would qualify for. On a $300,000 loan, a 1% rate reduction typically saves between $150 to $200 per month. Extending the term alongside a rate drop can increase your monthly savings.
What Is a Good Break-Even Period for a Refinance?
Most financial professionals consider 24 months or less a strong break-even point for a refinance. If you plan to stay in the home at least that long, then the refinance is likely worth it and will save you more than it costs. Break-even periods beyond 36 months deserve more scrutiny.
Can I Lower My Mortgage Payment Without Refinancing?
Yes, you can lower your mortgage payment without refinancing. Options include mortgage recasting, requesting PMI cancellation once you hit 20% equity, shopping for lower homeowners insurance premiums, or appealing your property tax assessment. These do not require a new loan but can often meaningfully reduce the amount you pay each month on your mortgage.
Conclusion and Next Steps
Refinancing your mortgage can often help you reduce your monthly payment, but it’s not all about finding a lower interest rate. Determining the right term, calculating the break-even point, and understanding your timeline and long-term goals as a homeowner are equally important parts of the equation and can help you make the best decision for your household in the long run.
Be sure to get several rate quotes, and then use a break-even calculator to determine if the numbers work for you. You can also use a refinance calculator to explore your full scope of options, or talk to a mortgage professional for personalized guidance.
All figures and calculations are hypothetical and for illustrative purposes only. They are not an offer or commitment to lend. Actual rates, terms, payments, costs, savings, and eligibility will vary.
