The short answer: refinance when your monthly savings will pay back the closing costs before you sell or refinance again, and when the new loan doesn't quietly cost you more over its full life. Both conditions matter, and the second one is the one people miss.
The old rule said wait for a full 1% drop. That's a decent starting point, but it's too blunt. What actually matters is the dollar savings against your specific balance. A 0.75% drop on a $400,000 loan saves far more than a 1.5% drop on an $80,000 loan, because closing costs don't shrink much with loan size.
Closing costs on a refinance typically run 2% to 6% of the loan: origination fees, an appraisal, title work, recording fees. That's the hurdle your savings have to clear. Bigger rate drop, bigger balance, longer time in the home; any of those three tilts the math your way.
This is the number that settles the question. Divide your total closing costs by your monthly payment savings, and you get the number of months until the refi has paid for itself.
Take a real example. You owe $300,000 at 7.5% with 25 years left, which is a $2,217 monthly payment. Refinancing into a 30-year loan at 6.25% drops that to $1,847, saving $370 a month. With $6,000 in closing costs, you break even in 17 months. Stay in the house past that point and you're genuinely ahead each month. Sell at month 12 and the refi lost you money.
A good gut check: if your break-even is under two years and you have no plans to move, the refi is probably solid. Between two and four years, think harder about how settled you are. Past five years, you need real certainty you're staying.
Enter your current loan and the rate you've been quoted. The calculator shows monthly savings, break-even months, and lifetime cost.
Refinance Break-Even Calculator →It can, and this is the part the payment comparison hides. In the example above, you traded 25 remaining years for a new 30-year loan. The payment fell by $370, but you signed up for 60 extra payments. Run the totals and the old loan had $365,092 of interest left, while the new one costs $364,975 over its full term. Add the $6,000 in closing costs and this "money-saving" refi actually costs about $5,900 over its lifetime.
That doesn't automatically make it a bad move. If the $370 a month keeps your budget breathing, monthly relief might be worth more to you than the long-run total. But you should choose that trade-off knowingly. Two ways to dodge the term trap:
A few situations where you should probably leave your current loan alone:
A cash-out refi replaces your mortgage with a bigger one and hands you the difference. It's a different decision from a rate-and-term refi, because you're borrowing more, usually at a slightly higher rate, and paying closing costs on the whole new balance. It can be sensible for renovations or consolidating expensive debt, but compare it honestly against a home equity line before committing. If your existing rate is low, keeping it and borrowing separately often wins. Run your current loan through a mortgage calculator first so you know exactly what you'd be giving up.
Three numbers, in order. First, your break-even months from the break-even calculator. Second, how long you realistically expect to stay. Third, the lifetime cost difference including the term reset. If the first is comfortably shorter than the second, and the third doesn't shock you, refinance. If any of them feels shaky, waiting costs you nothing; rates get quoted every day.
Sometimes. Half a point on a big balance can still save $100 to $150 a month, but the break-even stretches out. On a $300,000 loan with $6,000 in closing costs, a half-point drop might take four to five years to recoup. It works if you'll stay put that long and closing costs are lean.
There's no legal limit, though some lenders want six months of seasoning between refinances. The real constraint is math: each refi adds a fresh set of closing costs, and if you keep resetting to 30-year terms you never make progress on principal. Refinance when the numbers work, not just because rates dipped.
A little, briefly. The hard inquiry knocks off a few points, and a new account lowers your average account age. Rate shopping multiple lenders within a 14 to 45 day window counts as one inquiry. Most scores recover within a few months as long as you keep paying on time.