How it works
Refinancing replaces your current loan with a new one, usually to get a lower rate, change the term, or both. The main question is whether the savings outweigh the closing costs.
The break-even point is closing costs divided by monthly savings: how many months until the lower payment has paid back what refinancing cost. If you expect to sell or refinance again before then, it likely is not worth it.
Also look at lifetime interest. Resetting to a new 30-year term can lower the payment while adding years of interest; a shorter term may raise the payment but save far more overall.
Formula
Break-even months = closing costs ÷ (current payment − new payment)
Questions people ask
How much do closing costs run on a refinance?
Typically 2–5% of the loan amount, covering lender fees, appraisal, title insurance and recording. Some lenders offer no-closing-cost refinances in exchange for a higher rate.
How much should rates drop before refinancing?
There is no fixed rule. A drop of 0.75–1 percentage point is a common rough threshold, but the break-even point given your actual costs and plans is the better test.
Is rolling closing costs into the loan a good idea?
It avoids paying cash up front, but you pay interest on those costs for the life of the loan and start with a higher balance.