The rule people repeat is that you should refinance when rates drop a full point. That rule is wrong, and it has cost people money in both directions.
The only calculation that matters
Take your total closing costs. Divide by your monthly savings. That is your break-even in months.
Costs of $6,000 with savings of $250 a month means twenty four months to break even. If you will hold the loan longer than that, it works. If you are moving in eighteen months, it does not, no matter what the rate is.
A quarter-point drop on a large balance can beat a full point on a small one. Run your numbers, not the rule.
Four reasons that have nothing to do with rate
Dropping mortgage insurance. If you bought FHA and now have 20% equity, refinancing to conventional removes mortgage insurance for the life of the loan. That alone often justifies it at the same rate.
Getting out of an adjustable. If your ARM is approaching its adjustment, the certainty is worth paying for.
Removing someone from the loan. Divorce, a partnership ending, a co-signer moving on. A refinance is the only clean way.
Shortening the term. Going from thirty years to fifteen usually raises the payment and saves an enormous amount of interest.
When you should not
When you would give up a very low first mortgage rate to access equity. A cash-out refinance replaces the whole loan, so the new rate applies to your entire balance rather than just the cash you are taking. If you locked something in the twos or threes, a home equity line is almost always cheaper.
When you are restarting the clock late in the term. Refinancing twenty-two years into a thirty year loan back to another thirty resets you. Sometimes the cash flow is worth it, but understand the trade.
When you are moving soon. You will never reach break-even.
What to do instead of guessing
Send me your current balance, rate and remaining term. I will run the break-even honestly and tell you if the answer is to do nothing.
That is a real answer and it happens often.
About the numbers in this article
Any interest rates, monthly payments, down payment figures and repayment terms shown above are hypothetical examples for illustration only. They are not an offer to lend, not a rate quote, and not a commitment. No rate shown is locked or available on request.
The annual percentage rate will be higher than the note rate, because APR reflects financing costs in addition to interest. Both the rate and the APR you are offered depend on your credit score, loan amount, down payment, occupancy, property type, loan term and current market pricing, and will differ from any example here.
Payment examples show principal, interest, taxes and insurance. Your actual payment may be higher once mortgage insurance, HOA dues, flood insurance or other charges apply. Repayment terms shown are 30-year fixed unless stated otherwise.
All financing is subject to credit approval, income and asset verification, and a satisfactory appraisal. Programs, rates and terms are subject to change without notice, and not all products are available to all borrowers.
Ryan Van Til, NMLS #2732776. Pacific Trust Mortgage, NMLS #2573894. Licensed by the California Department of Real Estate. Equal Housing Opportunity. Your binding terms are those disclosed on your Loan Estimate and Closing Disclosure.