Homeowners

Thinking About Refinancing Your Mortgage? Here’s How to Know When It Makes Sense—And When It Doesn’t

Mortgage interest rates are finally starting to budge. A weaker-than-expected jobs report last month and speculation of a U.S. Federal Reserve rate cut in September mean mortgage rates may fall even further.

Homeowners who got saddled with high interest rates since the start of the pandemic might see this as the perfect time to refinance their mortgage to a lower rate. But is it?

Whether a refinance will actually save you money, or wind up costing you even more, depends on much more than just lower interest rates.

“It’s not how much rates need to fall before refinancing is worth it,” said Ken Johnson, chair of real estate at the University of Mississippi. “Instead, it’s the interplay of current and new payments after the refinance, the time value of money, the cost of refinancing, and how much longer you plan on remaining in the property.”

Johnson acknowledged this all “sounds complicated.” But it’s easy to break it down into simple terms. Here’s how to determine if a refinance makes sense for you.

Where mortgage rates are headed

In the years leading up to the COVID-19 pandemic, mortgage rates hovered in the 3% to 4% range. When the pandemic threatened a global economic catastrophe, the Fed cut interest rates and mortgage rates fell below 3%.

But to turn a phrase on its head: What goes down must come up. Over the last five years, amid inflation and Fed rate hikes, rates climbed above 7%. Many homeowners who purchased during this time have been itching for a rate drop so they can refinance.

It’s finally looking like we may get that.

Following the bleak July jobs reports from the federal government, many financial experts now anticipate the Fed will cut rates in September. This could lead to a potential drop in mortgage rates. (Mortgage rates are separate from the Fed’s rates but generally move in the same direction.)

Fannie Mae’s July 2025 Economic and Housing Outlook predicts rates will end this year at 6.4% and next year at 6%.

When it makes sense to refinance your mortgage

A drop in mortgage rates can look tempting. But how much do rates need to fall before you refinance?

“There are rules of thumb,” said Johnson. “But none of these rules have any basis in mathematical reasoning.”

That’s because only looking at rate drops leaves out other crucial components. Instead, you’ll need to weigh three core factors:

• How much refinancing will cost upfront in fees
• How much you’ll save each month
• How long you plan to stay in your current home

Refinancing could make sense if:

Your mortgage is relatively new

The earlier you refinance, the more you stand to save in the long-term.

“[Refinancing] works particularly well with loans in their first five to 10 years,” said Johnson.

You plan to stay in that home for a while

If you move shortly after refinancing, you likely won’t recoup the upfront costs through monthly savings. Instead, you may lose money on refinancing costs.

You have the money set aside

Closing costs range from 2% to 6% of the total financed amount. If you can’t refinance without draining an emergency fund or taking on debt elsewhere to cover those costs, refinancing might not be a good idea.

How to calculate your mortgage refinance break-even point

The best way to determine if a mortgage refinance is the right move is to calculate the break-even point. That’s the number of months it will take to recoup your upfront refinancing costs through lower monthly payments.

“Take the cost of the refinance and divide by the monthly payment savings (the difference between the new and old monthly payments),” explained Johnson. “The lender can provide both numbers.”

Refinance costs / Monthly payment savings = Break-even point

For instance, assume a $300,000 mortgage balance with 5% closing costs to refinance. That’s $15,000 in out-of-pocket costs upfront. Now, assume the refinance reduces your monthly payment by $200. Calculate the break-even:

$15,000 / $200 = 75 months

In this scenario, it will take 75 months (that’s six years and some change) before you recoup the $15,000 in closing costs. After that point, the monthly savings truly are savings.

When to skip refinancing

Before moving forward with a mortgage refinance, ask yourself:

• Will I move before I break even? If there’s a strong likelihood you’ll move before you reach the break-even point, skip the refinance and save your money.
• Could I use the money more wisely elsewhere? For instance, could you earn more money in the long-term by investing what you’d spend on the closing costs in something with a high return?
• Could rates fall further? Locking in now means you could miss out on bigger savings if rates continue to fall. Timing matters.

How to save money on your mortgage without refinancing

Refinancing your mortgage isn’t the only way to reduce how much you spend in interest over the life of your loan.

Instead, you could make extra payments toward the principal each month. Doing so will help you pay off the mortgage early and potentially save you thousands in interest over the life of the loan.

And if you currently have private mortgage insurance (PMI), making extra payments could help you get to that 20% equity threshold. This means you own at least 20% of your home through paying off your mortgage and home appreciation.

At that point, you may be allowed to remove PMI. This could lower your monthly payments.