Refinance Math in 2026: 2 Break-Even Tests That Tell You Whether It's Worth It
The median monthly mortgage payment for those who moved in 2024 is $2,225, according to the U.S. Census. That’s $26,700 a year. It’s also nearly 32% of the median household income, which was $83,730 in 2024.
Refinancing your mortgage could get you a lower interest rate. It might also get you a reduced monthly payment, especially if you opt for a longer repayment term.
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But refinancing isn’t always worthwhile. Here are two break-even tests to determine if it’s a good choice for you.
Divide Refinancing Costs by Monthly Savings
Before refinancing, you’ll want to know when your monthly savings outweigh the costs. This is the “break-even” point.
According to Freddie Mac, refinancing usually costs 3% to 6% of your loan principal. Common refinancing fees include:
Appraisal fees
Credit report fees
Government recording costs
Tax service fees
Title services
Lender origination fees
Attorney fees
Survey fees
Loan underwriting fees
Say your principal is $300,000 and the refinancing closing fees add up to $9,000 (3%). Now, say refinancing changes your monthly mortgage payment from $2,300 to $2,000. That’s $300 in monthly savings.
The first break-even test works like this.
Take the total refinancing costs ($9,000).
Divide that amount by your monthly savings ($300).
Get the result (30).
What this means is that it would take 30 months (or about 2.5 years) to recoup the amount you paid when refinancing. If you plan to keep your home beyond those 30 months, refinancing might make sense. If not, it probably doesn’t.
Note that if you paid more in closing fees — like $18,000 — it would take you longer to break even on the loan. Assuming you still save $300 monthly on your mortgage, it would take 60 months to break even.
Total Interest vs. Total Savings Test
Typically, refinancing a mortgage resets the loan term. Say you decide to refinance when you’re eight years into a 30-year loan. If the new loan also has a 30-year term, that essentially means you’re starting over.
In addition to any closing costs, the new loan will come with its own interest rate. Even if that rate is lower than what you’re paying now, refinancing could still mean paying more interest over time.
Say you took out a 30-year mortgage for $350,000 back in 2018, and that the interest rate was 6.5%. You decide to refinance for the same term, but with a 5.5% interest rate. Your monthly payment would decrease by $397, but the amount of total interest owed increases by $59,951.
If the goal is simply to lower your monthly payment, it might be worth it. But when you consider the long-term interest costs, it might not be.
“As a rule of thumb worth following, a homeowner should look for the new mortgage rate to be at least 0.75 to 1.0% lower than their existing mortgage rate to refinance a mortgage with a principal balance of less than $300,000,” said Blaz Korosec, a licensed realtor and co-founder of Investorade.
Other Factors To Consider When Refinancing
Refinancing shouldn’t be solely based on monthly savings. According to the Federal Reserve, you should also consider the equity in your home — before and after refinancing.
When you first take out a mortgage, most of your monthly payments go toward interest. After a while, you’ll see a shift where your payments mostly go toward your principal. This is when you’ll start seeing the equity build up more quickly.
But if you refinance for a similar or longer term, you’ll start all over again. This means you’ll pay more toward interest first, which can slow down your ability to build equity.
You may also be able to get a no-cost mortgage refinance. This means no closing fees, at least not upfront. However, your lender may roll those fees into the overall cost of the loan. This could mean a higher interest rate. Or the lender might include a prepayment fee that didn’t exist before.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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