Last reviewed: October 16, 2026 · By the MortgageCompass Editorial Team · How we research
Refinancing is worth it when the money you save, after closing costs, is greater than what you would pay by keeping your current loan over the years you expect to stay. With the average 30-year rate at 7.40% in mid-October 2026, according to Freddie Mac, most homeowners who bought or refinanced before 2023 already have a lower rate and would not benefit from a rate-and-term refinance today. It can still make sense if your rate is well above today’s level, or if you need to change the loan itself, for example to remove FHA mortgage insurance or switch from an adjustable to a fixed rate.
Five questions that decide it
- How much lower is the new rate? The old “one point lower” rule is only a rough guide. On a large loan with low costs, a smaller drop can pay off; on a small loan, even a full point may not.
- What will it cost? Closing costs often run to 2% to 5% of the loan amount, including lender fees, appraisal, title and recording. Check page 2 of the Loan Estimate.
- How long will you keep the loan? If you might sell or refinance again within a few years, you may not recover the costs.
- Are you restarting the clock? Refinancing a loan with 25 years left into a new 30-year loan lowers the payment, but adds five years of payments. Our amortization guide explains why the early years are mostly interest.
- Do you qualify on good terms? Lenders will check your credit, income and home value again. Less than 20% equity on a conventional loan usually means mortgage insurance.
Check your own break-even point
Simply dividing closing costs by the monthly saving can mislead you, because it ignores how much you still owe. The timeline below compares, for each year, what you would have paid plus your remaining balance under both options.
Refinance break-even timeline
See year by year whether refinancing leaves you ahead, counting closing costs and the balance you would still owe.
Compares what you would pay plus what you would still owe at the end of each year, with closing costs paid upfront. Principal and interest only. Taxes, insurance, mortgage insurance and the return you could earn on the closing-cost money are left out. Not financial advice.
Illustrative example. A homeowner owes $350,000 at 7.90% with 28 years left, a rate typical of loans taken out near the late-2023 peak, and is offered 7.10% on a new 30-year loan with $8,000 of closing costs. The payment falls by about $238 a month, and the refinance pays for itself during the third year. After ten years they are about $17,500 ahead. But if they sold after two years, they would be around $2,500 worse off. Choosing a 20-year term at a similar rate raises the monthly payment, yet leaves them further ahead over ten years, because far more of each payment reduces the balance.
Good reasons to refinance besides a lower rate
- Removing FHA mortgage insurance. FHA premiums usually last for the life of the loan if you put down less than 10%. Once you have about 20% equity, a conventional refinance can remove them, which may save money even without a lower rate.
- Switching from an adjustable to a fixed rate before a rate reset, if you want predictable payments.
- Shortening the term to pay off the loan sooner, if you can afford a higher payment.
- Removing a borrower after a divorce or separation.
- Cash-out refinancing to access equity. Rates on cash-out loans are usually higher, and you are borrowing against your home, so compare it with a home equity loan or line of credit that leaves your current low rate untouched.
Lower-cost refinance options for government loans
If you already have an FHA or VA loan, streamlined programs can reduce paperwork and costs. An FHA Streamline Refinance usually needs no new appraisal and limited income documentation, but you must show a real benefit, such as a lower combined rate and premium. A VA Interest Rate Reduction Refinance Loan, known as an IRRRL, has a funding fee of 0.5% and also requires a net benefit. Both still have closing costs, so run the timeline above before applying.
When to wait
If your current rate is near or below today’s average, refinancing to lower your rate will not help yet. Instead, work out the rate at which it would pay off, using the tool above, and watch for it. Forecasters currently expect rates to stay around 7% to 7.5% through 2027, as explained in our mortgage rate predictions, so plan as if you may keep your current loan for some time. Meanwhile, extra payments on your existing loan can save interest without any closing costs. To compare current rates, see today’s mortgage rates.
Frequently asked questions
How soon can I refinance after buying?
Many conventional lenders will refinance a rate-and-term loan quickly, but cash-out refinances and streamlined government programs usually require several months of on-time payments first. Check whether your current loan has a prepayment penalty.
Can I roll closing costs into the new loan?
Often yes, or you can accept a slightly higher rate in exchange for lender credits. Either way you still pay the costs, through a bigger balance or a higher rate, so include them in your comparison.
Does refinancing hurt my credit score?
There is usually a small, temporary dip from the credit check and the new account. Shopping several lenders within a short window limits the effect, because multiple mortgage inquiries are normally counted as one.
Sources
- Freddie Mac: Primary Mortgage Market Survey
- CFPB: Understanding your Loan Estimate
- U.S. Department of Veterans Affairs: Funding fee, including IRRRL refinances
This guide is for informational purposes only and is not financial advice. Refinancing costs, rates and eligibility vary by lender and borrower. Compare official Loan Estimates and consider speaking to a licensed adviser before you refinance.