If you’re considering refinancing your mortgage to take advantage of today’s lower rates, you’re not alone. As of late September 2025, the average 30-year fixed mortgage rate hovers around 6.3%, down from highs near 8% in 2024. Even small reductions like this can make refinancing appealing.
Homeowners often hear the rule of thumb that refinancing is only worthwhile if you can lower your rate by at least 1%. But is that really true? How much does a 1% drop actually save you, and when does it make sense to refinance? Let’s break it down.
Note: All figures are for illustrative purposes only. Actual rates, payments, and savings will vary based on individual circumstances.
- A 1% drop in mortgage rates can significantly reduce both monthly payments and total interest, especially for larger loans.
- Closing costs and the breakeven period determine whether refinancing actually saves you money.
- Refinancing makes sense if you plan to stay in your home long enough to recoup costs, but not if you’ll move soon or reset your loan into more total interest.
How we source rates and rate trends
Rates based on market averages as of Dec 02, 2025.Product Rate APR 15-year Fixed Refinance 5.37% 5.42% 30-year Fixed Refinance 6.35% 6.37%
How Much Does 1% of Interest Impact Your Payments?
Even a 1% drop in your interest rate can make a big difference. Let’s see how:
Example: Suppose you have a $320K mortgage on a 30-year fixed rate of 7.5%.
- Current payment: about $2,237 per month (principal + interest).
- Total interest if left unchanged: about $486,000.
If you refinance at 6.5% (a full 1% drop):
- New payment: about $2,023 per month.
- Monthly savings: around $215.
- Lifetime interest savings: about $77,353 (even with the loan reset to 30 years).
How does that compare to, let’s say, a 0.5% rate reduction? At 7%:
- New payment: about $2,129 per month.
- Monthly savings: roughly $109.
- Lifetime interest savings: about $39,067.
In this case, the half-point drop produces much smaller savings—and once closing costs are factored in, refinancing may not be worthwhile unless you plan to stay in your home for many years.
Keep in mind that the lifetime interest savings figures throughout this article compare the full cost of two 30-year loans from the beginning. If you’ve already had your mortgage for a while, you’ve likely paid a significant amount of interest already, and your loan balance will be smaller upon refinancing. That sunk cost doesn’t go away, but refinancing can still reduce your future payments and interest costs.
We break all these factors down into further detail below.
Key Factors
The mortgage interest rate you will pay is a crucial factor to consider before committing to a refinance. But it’s not the only factor you should evaluate carefully.
Let’s dig deeper into other matters that should play a major role in your decision.
Loan Size
The amount of money you need to borrow – called your principal – makes a big difference here.
“Larger loans benefit more from smaller rate changes because the overall savings are magnified,” says Dennis Shirshikov, an economics and finance professor at City University of New York/Queens College.
To demonstrate why loan size matters, let’s say you have a $480,000 mortgage at a 30-year fixed rate of 7.5%:
- Monthly payment (original loan): about $3,356
- Total interest over 30 years: about $728,243
Now, if you refinance at 6.5%:
- New monthly payment: about $3,034
- Monthly savings: about $322
- Lifetime interest savings: around $116,029
That’s far more than the $215 per month and $77,353 lifetime savings you’d see from refinancing a $320,000 loan. Larger balances magnify the benefits of even small rate cuts.
Loan Term
The length of time left to repay your loan is significant, too.
Example: Let’s go back to the $320,000 loan at 7.5% for 30 years.
- Monthly payment: about $2,237
- Lifetime interest if you never refinance: about $486,000
Now imagine you refinance after five years instead of one. At that point:
- You’ve already paid about $117,000 in interest
- Your remaining balance is about $302,776
If you refinance that balance into a new 30-year loan at 6.5%:
- New monthly payment: about $1,914
- Lifetime interest on the new loan alone: about $386,000
- Total interest paid overall (first 5 years + new loan): just over $503,000
So even though your monthly payment drops by about $324, your total lifetime interest ends up higher compared with sticking with your original loan. That’s because you’ve already paid five years of interest and are starting over on another full 30-year term.
The key is to balance the short-term win of lowering your payment against the long-term cost of paying more interest overall.
One way to mitigate that trade-off is to refinance into a shorter loan term, such as a 25- or 20-year mortgage, which lets you capture a lower rate without resetting the clock all the way back to 30 years.
Costs of Refinancing
Often, the make-or-break factor for many borrowers on the fence about a refinance is how much it will cost. You can likely expect to pay between 2% and 5% of your loan amount in refinance closing costs.
Using the earlier example, where you refinance your existing loan with an outstanding principal balance of $316,945 (from the $320,000 loan you took out one year earlier), your closing costs could be between roughly $6,000 and $16,000.
Considering you’ll be saving about $77,353 in total interest by refinancing in this example, the costs to refinance could be worth it—assuming you plan to stay put and not move or sell your home anytime soon (more on this next).
Breaking Even on a Refinance
Closing costs should play a huge role in your decision, and the best way to measure them is by calculating your breakeven period—the time it takes for monthly savings to outweigh the upfront costs.
For example, if your closing costs are $6,000 and your monthly savings are $200, your breakeven period would be 30 months. If you plan to sell or move before then, refinancing likely won’t make financial sense.
Use our refinance break-even calculator to run your numbers.
When a 1% Drop Makes Refinancing Worthwhile
Now that we’ve covered the major factors, let’s address the big question: is refinancing worth it for a 1% rate drop?
A 1% reduction can be worthwhile, especially if you have a larger loan balance or plan to stay in your home long term.
The general rule of thumb is that refinancing usually makes sense if you can reduce your rate by at least a full percentage point and your breakeven period is reasonable.
Remember:
- Bigger loans benefit more from small rate changes, since the savings add up faster.
- A long breakeven period is risky if you think you’ll sell your home soon.
- Resetting to a new 30-year term after already paying several years can increase your total lifetime interest, even if your monthly payment falls.
When Refinancing for 1% Doesn’t Make Sense
Refinancing isn’t always the right move, even with a full percentage point drop.
It may not make sense if you:
- Plan to sell your home within the next few years, since you may not reach the breakeven point before moving.
- Can’t afford the closing costs (even if you roll them into the loan).
- Would end up paying significantly more in total interest by restarting your loan term.
- Expect rates to drop further and prefer to wait.
In short, refinancing for 1% is about timing and your personal plans — not just the rate itself.
What to Do If a 1% Drop Makes Sense
If you’ve run the numbers and a 1% drop in your rate passes the breakeven test, here are some smart next steps:
- Shop multiple lenders – Even small differences in rates and fees can add up to thousands over the life of your loan. Get at least three quotes.
- Compare closing costs – Look beyond the interest rate. A slightly higher rate with lower fees may actually save you more depending on how long you stay in the home.
- Check your credit and finances – A stronger credit score and lower debt-to-income ratio can qualify you for better rates.
- Decide on a loan term – Consider whether sticking with a 30-year term, moving to a 25-year, or even a 20-year loan fits best with your financial goals.
- Lock your rate – If rates are favorable and you’re ready to move forward, ask about locking your rate to protect against market swings during the application process.
The Bottom Line
Again, doing the math before committing to a refinance is essential.
Calculate how much you’d save in the short and long terms, as well as your breakeven period.
Ready to get started? Talk with a trusted loan officer at Refi.com who can help you explore all your options and determine if refinancing is worth it.
