Refinancing resets the clock on closing costs — typically 2–5% of the loan amount, due again even though you already paid them once. A lower rate is only a win once your monthly savings have paid back those costs; before that point, you're behind, not ahead.
The break-even calculation
Divide your total closing costs by your monthly savings from the new rate. The result is your break-even point in months. If you plan to stay in the home well beyond that point, refinancing likely makes sense; if you might sell or refinance again before then, the costs may never be recovered.
$6,000 in closing costs, $150/month in payment savings → 40-month break-even. Selling the home in year two means the refinance cost you money overall, regardless of the lower rate.
Resetting the term matters as much as the rate
Refinancing into a new 30-year loan after you've already paid down several years of your original mortgage restarts the amortization schedule — more of each new payment goes to interest again in the early years. A lower monthly payment can still mean paying more in total interest over the life of the loan if the term resets. Comparing total interest over the full remaining timeline, not just the new monthly payment, avoids this trap.
Cash-out refinances are a separate decision
A cash-out refinance increases your loan balance to access home equity as cash. It's worth evaluating as its own decision — comparing the new rate against what a home equity loan or HELOC would cost for the same amount — rather than folding it into a simple rate-reduction refinance calculation.
A short checklist before refinancing
| Question | Why it matters |
|---|---|
| What's the break-even in months? | Compare against how long you plan to stay |
| Does the new loan reset your term? | Can increase total interest despite a lower payment |
| What's the new rate vs. your current one? | A gap under roughly 0.5–0.75% often isn't worth the costs |
The bottom line
"Rates dropped, so refinance" skips the two numbers that actually decide the answer: your break-even point and how long you'll stay in the loan past it. Run both before assuming a lower advertised rate is automatically worth the closing costs.