My friend Jake refinanced his mortgage last month and couldn’t stop telling everyone how much money he was going to save. He’d cut his interest rate by a full percentage point and was saving $300 a month.
“You should definitely refi,” he kept telling me.
Here’s what he didn’t mention until I asked: his refinance cost him $8,500 in closing costs. At $300 per month in savings, it would take him 28 months—more than two years—just to break even. And he’s planning to sell his house in 18 months when his job relocates him.
Jake will lose money on his refinance.
This happens all the time. People see the lower monthly payment or the reduced interest rate and assume refinancing is automatically a smart move. Sometimes it is. Often it isn’t. It completely depends on your specific numbers, the length of your stay in the house, and what you’re trying to accomplish.
This guide will walk you through exactly when refinancing makes sense, how to calculate your break-even point, current rates, and help you determine whether you should refinance now or wait.
Quick Answer: Should You Refinance Right Now?
Before we go deep, here’s the fast answer:
You should strongly consider refinancing if:
- Your current rate is 7.5% or higher (you can save significantly)
- You’ve been in your house less than 3 years, and rates have dropped
- You’re planning to stay in your home for at least 3-5 more years
- Your credit score has improved dramatically since you bought
- You want to switch from an ARM to a fixed-rate mortgage
You should probably wait if:
- Your current rate is below 5%
- You’re planning to sell within 2 years
- You don’t have enough home equity (under 20%)
- Your credit score has gotten worse
- You’re tight on cash for closing costs
Current refinance rate (October 2025): 6.68% for a 30-year fixed mortgage
What Is Mortgage Refinancing?
Refinancing means you’re taking out a completely new mortgage to replace your existing one. You’re not modifying your current loan—you’re getting a new loan that pays off the old one.
Here’s how it works in practice:
Let’s say you bought your house three years ago with a $400,000 mortgage at an interest rate of 7.25%. You still owe $385,000. You apply for a new mortgage at today’s rate of 6.68%. If approved, your new lender will give you $385,000, which will pay off your original mortgage. Now you have a brand new $385,000 mortgage at 6.68%.
Why people refinance:
- Lower interest rate (most common reason)
- Lower monthly payment
- Shorter loan term to pay off faster
- Switch from adjustable to fixed rate
- Cash out home equity for other needs
- Remove private mortgage insurance (PMI)
- Remove someone from the mortgage (ex-spouse)
How Much Can You Really Save By Refinancing?
Let me show you real numbers because that’s what actually matters.
Example 1: Lowering Your Rate by 1%
Original mortgage:
- Loan amount: $350,000
- Interest rate: 7.25%
- Monthly payment: $2,388
- Remaining term: 27 years
Refinanced mortgage:
- Loan amount: $350,000
- Interest rate: 6.25%
- New monthly payment: $2,155
- New term: 30 years
Monthly savings: $233 Refinance closing costs: $7,000 Break-even point: 30 months (2.5 years)
After 30 months, you start actually saving money. If you stay in the house for 10 more years, you’ll save approximately $20,960 in total after accounting for closing costs.
Example 2: Lowering Your Rate by 0.5%
Original mortgage:
- Loan amount: $250,000
- Interest rate: 7.00%
- Monthly payment: $1,663
- Remaining term: 25 years
Refinanced mortgage:
- Loan amount: $250,000
- Interest rate: 6.50%
- New monthly payment: $1,580
- New term: 30 years
Monthly savings: $83 Refinance closing costs: $5,000 Break-even point: 60 months (5 years)
This is a borderline case. You need to stay in the house at least 5 years to come out ahead. If there’s any chance you’ll move sooner, refinancing doesn’t make financial sense.
Example 3: Refinancing to a Shorter Term
Original mortgage:
- Loan amount: $300,000
- Interest rate: 6.75%
- Monthly payment: $1,946
- Remaining term: 28 years
- Total interest paid: $347,984
Refinanced to 15-year mortgage:
- Loan amount: $300,000
- Interest rate: 6.00% (15-year rates are lower)
- New monthly payment: $2,532
- New term: 15 years
- Total interest paid: $155,760
Monthly payment increases by $586, but:
- You’ll pay off your house 13 years sooner
- You’ll save $192,224 in interest over the life of the loan
- You build equity much faster
This strategy makes sense if you can afford the higher payment and want to be mortgage-free sooner.
Current Mortgage Refinance Rates (October 2025)
Here are the average rates for refinancing right now:
- 30-Year Fixed Refinance: 6.68% APR
- 15-Year Fixed Refinance: 6.00% APR
- 5/1 Adjustable Rate (ARM): 6.25% APR (initial rate)
- FHA Refinance: 6.50% APR
- VA Refinance: 6.35% APR (for qualifying veterans)
These are national averages. Your actual rate will depend on:
- Your credit score
- Loan-to-value ratio (how much equity you have)
- Debt-to-income ratio
- Property type and location
- Loan amount
- Points paid (if any)
Important context: Rates have been holding relatively steady in 2025 after the Federal Reserve cut its benchmark rate in September. However, most homeowners who bought before 2022 have mortgage rates well below 5%, which means refinancing at today’s rates doesn’t make sense for them.
The sweet spot for refinancing right now is people who bought when rates were 7-8% in 2023-2024. They can save significantly by refinancing to current rates.
How to Calculate Your Break-Even Point
This is the single most important calculation for deciding if you should refinance.
Your break-even point is how many months it takes for your monthly savings to add up to more than your refinancing costs.
The formula:
Break-Even Months = Total Refinance Costs ÷ Monthly Savings
Step-by-step example:
- Calculate your current monthly payment
- Current mortgage: $300,000 at 7.5% for 28 years remaining
- Monthly payment: $2,098
- Calculate your new monthly payment
- New mortgage: $300,000 at 6.68% for 30 years
- New monthly payment: $1,927
- Find your monthly savings
- $2,098 – $1,927 = $171 per month saved
- Add up all refinancing costs
- Closing costs: $6,000
- Any additional fees: $500
- Total costs: $6,500
- Calculate break-even
- $6,500 ÷ $171 = 38 months (about 3.2 years)
Decision: If you’re planning to stay in your house at least 3.2 years, refinancing makes sense. If you’re selling in 2 years, you’d lose money.
What Are Refinancing Closing Costs?
Refinancing isn’t free. You’ll pay closing costs just like you did when you bought the house—typically 2% to 6% of the loan amount.
Typical refinance closing costs on a $300,000 mortgage:
Lender Fees ($2,000-$4,000):
- Application fee: $200-$500
- Origination fee: $1,000-$2,500 (1% of loan amount)
- Underwriting fee: $400-$900
- Processing fee: $300-$500
Third-Party Fees ($1,500-$3,000):
- Appraisal: $400-$600
- Credit report: $25-$50
- Title search and insurance: $700-$1,500
- Attorney fees: $500-$1,000
- Survey fee: $200-$500
Government Fees ($300-$800):
- Recording fee: $100-$250
- Transfer taxes: $200-$550
Prepaid Costs ($500-$2,000):
- Prepaid interest: $300-$800
- Property tax escrow: $200-$600
- Homeowners insurance escrow: $100-$600
Total typical range: $4,300-$9,800
Most lenders let you roll closing costs into your new loan, which means you don’t pay out of pocket but you’re financing them over 30 years. This makes the math on break-even more complicated but can help if you’re short on cash.
Types of Refinancing (And Which One You Need)
Not all refinances work the same way. Here are the main types:
Rate-and-Term Refinance
What it is: Change your interest rate, your loan term, or both. Your loan amount stays roughly the same.
Best for:
- Lowering your monthly payment
- Getting out of an ARM before it adjusts
- Switching to a shorter term to pay off faster
Example: You have a 7.25% 30-year mortgage and refinance to 6.68% for 30 years. Your balance stays the same but your rate and payment drop.
Cash-Out Refinance
What it is: Borrow more than you owe and take the difference in cash.
How it works: You owe $250,000 on your home worth $400,000. You refinance for $300,000, paying off your $250,000 mortgage and getting $50,000 in cash (minus closing costs).
Best for:
- Home improvements that add value
- Paying off high-interest debt
- Major expenses like medical bills or college tuition
Cons:
- Higher interest rates than rate-and-term refis
- You’re reducing your home equity
- You might have to pay PMI if you drop below 20% equity
- You’re turning home equity into debt
Cash-In Refinance
What it is: Pay down your mortgage balance when refinancing by bringing cash to closing.
Why you’d do this:
- Get a lower interest rate (available at lower loan-to-value ratios)
- Eliminate PMI
- Qualify for the refinance if you’re underwater
Example: You owe $210,000 on a home worth $250,000 (84% LTV). You bring $10,500 to closing to refinance for $199,500 (under 80% LTV), eliminating PMI and getting a better rate.
Streamline Refinance (FHA or VA)
What it is: Fast-track refinancing for FHA or VA loans with minimal documentation.
Benefits:
- Often no appraisal required
- Less paperwork
- Lower closing costs
- No income verification in some cases
Types:
- FHA Streamline: For existing FHA loans only
- VA IRRRL (Interest Rate Reduction Refinance Loan): For existing VA loans only
These are great options if you qualify because they’re faster and cheaper than conventional refinances.
When Refinancing Makes Sense
Let me give you specific scenarios where refinancing is smart:
Scenario 1: You Bought When Rates Were High
If you bought in 2023-2024 when rates were 7-8%, and you can refinance to 6.5-6.75%, you’ll save significantly.
Real example:
- Original: $400,000 at 7.75% = $2,871/month
- Refinance: $400,000 at 6.68% = $2,570/month
- Monthly savings: $301
- With $8,000 in closing costs, break-even is 27 months
If you’re staying put more than 2-3 years, this is a no-brainer.
Scenario 2: Your ARM Is About to Adjust
If you have a 5/1 or 7/1 ARM and your fixed-rate period is ending, refinancing to a fixed-rate mortgage locks in your rate before it can increase.
Example:
- You have a 5/1 ARM currently at 5.5% (fixed period ending)
- Rate will adjust to 7.5% based on current indices
- Refinance to 6.68% fixed saves you $165/month and prevents future increases
Scenario 3: You Want to Pay Off Your Mortgage Faster
Refinancing from a 30-year to a 15-year mortgage builds equity much faster and saves huge amounts in interest.
Consideration: Only do this if you can comfortably afford the higher payment. Don’t stretch yourself thin.
Scenario 4: You Have PMI and Can Now Eliminate It
If your home has appreciated or you’ve paid down enough principal to have 20% equity, refinancing can remove PMI.
Example:
- Current loan: $240,000 on a home now worth $325,000 (74% LTV)
- PMI cost: $125/month
- Refinance removes PMI, saving $1,500/year
- Even if your new rate is slightly higher, removing PMI could save money overall
Scenario 5: Your Credit Score Has Improved Significantly
If your score has jumped from 680 to 750 since you bought, you’ll qualify for much better rates.
Typical rate improvement: 0.5% to 1% better rate with a 70+ point credit score increase
When You Should NOT Refinance
Refinancing isn’t always smart. Here’s when to skip it:
You’re Planning to Move Soon
If you’ll sell within 2-3 years, you probably won’t recoup your closing costs.
Exception: If your savings are massive (like $500+/month) and closing costs are low, your break-even might be just 12-18 months.
Your Current Rate Is Already Low
If you’re locked in at 4% or lower from 2020-2021, refinancing at today’s 6.68% makes no sense. Keep that rate.
You Don’t Have Enough Equity
Most lenders want at least 20% equity for the best rates. Under 80% LTV (loan-to-value), you might pay PMI on the new loan or get worse rates.
You’re Struggling Financially
Refinancing costs money upfront. If you’re barely scraping by, using savings for closing costs could backfire if an emergency hits.
You’re Late in Your Mortgage Term
If you’ve been paying your mortgage for 20+ years, most of your payment now goes to principal rather than interest. Refinancing resets the clock and puts you back to paying mostly interest for the first decade.
Example: You’ve paid a 30-year mortgage for 22 years. You only have 8 years left. Refinancing to a new 30-year mortgage means 30 more years of payments—even if the rate is lower, you might pay more total interest.
How Your Credit Score Affects Your Refinance Rate
Your credit score has a massive impact on the rate you’ll qualify for.
Typical rate differences by credit score:
- 760-850 (Excellent): Best available rates, 6.68% on average
- 700-759 (Good): About 0.25% higher, 6.93%
- 680-699 (Fair): About 0.50% higher, 7.18%
- 660-679 (Fair): About 0.75% higher, 7.43%
- 640-659 (Poor): About 1.00% higher, 7.68%
- 620-639 (Poor): About 1.50% higher, 8.18%
- Below 620: Very difficult to qualify
On a $300,000 mortgage, the difference between a 760 score (6.68%) and a 660 score (7.43%):
- 760 score: $1,927/month
- 660 score: $2,074/month
- Difference: $147/month or $1,764/year
- Over 30 years: $52,920 more in payments
If your credit score is borderline, it might be worth spending 6-12 months improving your score before refinancing. Even a 20-30 point increase can save you thousands.
The Refinancing Process Step-by-Step
Here’s exactly what happens when you refinance:
Step 1: Check Your Credit (Do This First)
Pull your credit reports from all three bureaus. Check for errors and dispute anything incorrect. Your lender will use your middle score from the three bureaus.
Free credit reports: AnnualCreditReport.com
Step 2: Calculate Your Home Equity
You need to know your home’s current value and how much you owe.
Current market value: Order a professional appraisal or use online estimates from Zillow, Redfin, or Realtor.com as a starting point
Loan-to-value formula: (Loan Amount ÷ Home Value) × 100
Example: You owe $240,000 on a home worth $350,000 LTV = ($240,000 ÷ $350,000) × 100 = 68.6%
Best rates typically require under 80% LTV.
Step 3: Shop Multiple Lenders
Don’t just go with your current lender. Get quotes from at least 3-5 lenders:
- Your current mortgage lender
- 2-3 online lenders (Better.com, Rocket Mortgage, etc.)
- 1-2 local banks or credit unions
- 1 mortgage broker who can shop multiple lenders
All quotes within 14-45 days count as one credit inquiry, so shop aggressively.
Step 4: Compare Loan Estimates
Lenders must provide a standardized Loan Estimate within 3 business days of your application. Compare:
- Interest rate
- APR (includes fees)
- Monthly payment
- Total closing costs
- Lender credits or points
- Prepayment penalties (if any)
Step 5: Lock Your Rate
Once you’ve chosen a lender, lock your interest rate. Rate locks typically last 30-60 days. If you don’t close within that window, you might have to re-lock at whatever rate is available then.
Step 6: Complete the Application
You’ll need to provide:
- Recent pay stubs (last 2 months)
- W-2s from last 2 years
- Tax returns from last 2 years
- Bank statements (last 2 months)
- Current mortgage statement
- Homeowners insurance policy
- Photo ID
- Proof of any additional income
Step 7: Home Appraisal
The lender orders an appraisal to confirm your home’s value. This costs $400-$600 and you usually pay upfront.
If the appraisal comes in lower than expected, you might:
- Not qualify for the refinance
- Need to bring more cash to closing
- Get a worse interest rate
- Dispute the appraisal and order a second one
Step 8: Underwriting
An underwriter reviews your entire application to make sure everything checks out. They might request additional documents. This process takes 1-3 weeks.
Step 9: Clear to Close
Once underwriting approves you, you’re “clear to close.” You’ll receive a Closing Disclosure at least 3 business days before closing that shows your final loan terms and costs.
Review this carefully. Make sure the rate, payment, and costs match what you were quoted.
Step 10: Closing
You’ll sign a mountain of paperwork. Bring:
- Photo ID
- Certified check or wire confirmation for closing costs (if not rolled into loan)
- Proof of homeowners insurance
After closing, your old loan is paid off and your new loan begins. You typically skip one month of mortgage payments during the transition.
Total timeline: 30-45 days from application to closing in most cases
Common Refinancing Mistakes to Avoid
Mistake 1: Focusing Only on Monthly Payment
A lower payment sounds great, but if you’re extending your loan term, you might pay more interest over time.
Example:
- Current: $300,000 at 7.0% with 25 years left = $2,121/month
- Refinance: $300,000 at 6.5% for new 30-year term = $1,896/month
You save $225/month, but you’re adding 5 years to your mortgage. That extra 5 years costs you $114,120 in additional payments even though your monthly payment is lower.
Mistake 2: Not Shopping Around
The first lender you talk to is rarely your best option. Different lenders have different costs, rates, and fees.
Average savings from getting multiple quotes: 0.25% to 0.5% on your interest rate, saving $50-$100/month
Mistake 3: Resetting to a 30-Year Term When You’re Halfway Through
If you’ve been paying your mortgage for 15 years and refinance to a new 30-year mortgage, you’re starting over. You’ll be 45 years into mortgage payments before you own your home outright.
Better option: If you’re 15 years in, refinance to a 15-year term instead of 30 if you can afford the payment.
Mistake 4: Taking Cash Out for Unnecessary Purchases
Using your home equity to buy a boat, take a vacation, or buy a car is turning a secured, tax-advantaged debt into consumer purchases.
Good uses for cash-out refinancing:
- Home improvements that increase property value
- Paying off high-interest credit card debt
- Medical emergencies
- Education costs
Bad uses:
- Depreciating assets (cars, boats)
- Vacations
- Consumer purchases
- Lifestyle inflation
Mistake 5: Not Understanding Adjustable-Rate Mortgages
ARMs can offer lower initial rates, but if you don’t understand when and how they adjust, you could get hit with a much higher payment.
Make sure you know:
- When the fixed period ends
- What index your rate is tied to
- How much your rate can increase per adjustment
- What the maximum lifetime rate is
Mistake 6: Ignoring the Break-Even Point
Just because you can refinance doesn’t mean you should. Always calculate how long it takes to recoup your costs.
Mistake 7: Paying Points When You’re Not Staying Long
Paying points (upfront fees to buy down your interest rate) only makes sense if you’re keeping the mortgage long enough to benefit from the lower rate.
Each point typically costs 1% of your loan amount and lowers your rate by 0.25%.
Example: On a $300,000 mortgage, 1 point = $3,000 upfront to lower your rate from 6.75% to 6.50%, saving you $48/month. Break-even: 62 months (5+ years).
Should You Refinance from a 30-Year to 15-Year Mortgage?
This is one of the most common refinancing questions, and the answer depends entirely on your financial situation.
Pros of Refinancing to 15 Years:
Build equity incredibly fast – Most of your payment goes to principal from day one
Save massive amounts in interest – You’ll pay less than half the total interest of a 30-year loan
Lower interest rate – 15-year rates are typically 0.50-0.75% lower than 30-year rates
Mortgage-free much sooner – You’ll own your home outright in half the time
Cons of Refinancing to 15 Years:
Much higher monthly payment – Often 40-50% higher than a 30-year
Less financial flexibility – That extra money is locked into your house
Opportunity cost – Could you earn more by investing the difference?
Cash flow strain – If money gets tight, you can’t easily lower the payment
Real Example: 30-Year vs 15-Year
$300,000 Loan at 6.68% for 30 years:
- Monthly payment: $1,927
- Total paid over life of loan: $693,720
- Total interest paid: $393,720
$300,000 Loan at 6.00% for 15 years:
- Monthly payment: $2,532 (31% higher)
- Total paid over life of loan: $455,760
- Total interest paid: $155,760
By choosing 15 years, you:
- Pay $605 more per month
- Save $237,960 in total interest
- Own your home in half the time
The question is: Can you afford the $605 extra per month comfortably, and is being mortgage-free in 15 years worth less financial flexibility now?
Refinancing vs Home Equity Loan vs HELOC
If you need to tap your home’s equity, refinancing isn’t your only option.
Cash-Out Refinance
Pros:
- One loan, one payment
- Usually lowest interest rate
- Can change your rate and term at the same time
Cons:
- Resets your mortgage clock
- Highest closing costs
- Longer process
Home Equity Loan
Pros:
- Keep your current low mortgage rate
- Fixed rate and payment
- Lower closing costs than refinancing
- Faster approval
Cons:
- Second monthly payment to manage
- Usually higher rate than refinance
- Shorter repayment term (5-15 years typical)
Home Equity Line of Credit (HELOC)
Pros:
- Revolving credit line (use only what you need)
- Interest-only payments during draw period
- Very flexible
- Lowest closing costs
Cons:
- Variable interest rate (can increase)
- Payment can jump significantly after draw period ends
- Temptation to overspend
- Third monthly payment
Which to choose:
- Keep current rate under 5%? Home equity loan or HELOC
- Current rate over 7%? Cash-out refinance
- Need flexibility? HELOC
- Want predictable payments? Home equity loan or cash-out refinance
The Bottom Line: Should You Refinance Your Mortgage?
After looking at all the numbers and scenarios, here’s my straightforward advice:
Refinance now if:
You’re currently paying 7.5% or higher—you’ll save significantly even with closing costs. The break-even will be quick, and over 5-10 years, you’ll save tens of thousands.
You have an ARM adjusting soon—lock in a fixed rate before it increases and protect yourself from future rate hikes.
You’re planning to stay in your home at least 3-5 more years—enough time to recoup closing costs and start actually saving money.
Wait or skip refinancing if:
Your rate is already below 5%—you’d be refinancing into a higher rate, which makes no sense unless you’re trying to tap equity or change terms for other reasons.
You’re selling within 2 years—you won’t break even on closing costs, meaning you’ll lose money overall.
Your credit has gotten worse—fix your credit first, then refinance when you can qualify for better rates.
Use our refinance calculator above to run your specific numbers. Your break-even point is the key metric that determines whether refinancing makes sense.
The bottom line? Refinancing can save you thousands of dollars or cost you money depending on your situation. Do the math first, don’t rush, and always shop multiple lenders for the best deal.
