Is refinancing worth it for a 1% lower rate? Half a point, one point and one and a half, worked through
The old rule said to refinance when rates fall a full point. It was a rule for a world of large closing costs and no calculators, and it is roughly right for the wrong reasons: a 1% cut usually pays back fast, but what decides the question is the size of the cut against the costs, how long you keep the loan, and whether you let the term reset. This page runs one loan through three rate cuts with the mortgage refinance break-even calculator, which compares keeping the loan you have against replacing it, month by month.
The example
- Current loan. $300,000 owed at 7.50%, with 27 years (324 payments) left. Principal and interest: $2,162.20 a month. Kept to the end it costs $400,553 of interest.
- New loan. The same $300,000 over a new 30-year term at 7.00%, 6.50% or 6.00%. For context, the Freddie Mac survey's average 30-year fixed rate was 7.03% as of September 24, 2026 (Freddie Mac PMMS).
- Closing costs. $6,000, 2% of the balance, paid in cash. That is an assumption; the real figure is the "Total Closing Costs" line of the Loan Estimate a lender must give you (CFPB).
- Cash earns 4%. Both paths spend the same money every month: the refinance side invests its lower payment, and the keep side invests the $6,000 it did not spend at closing. The calculator's default of 4% is a savings-account figure.
Three cuts, three break-evens
| New rate | Payment | Saving a month | Cost ÷ saving | Break-even, cash at 4% | Ahead after 3 years | After 5 | After 10 |
|---|---|---|---|---|---|---|---|
| 7.00% (0.5% less) | $1,995.91 | $166.29 | Month 37 | Month 56 | -$2,142 | +$481 | +$6,974 |
| 6.50% (1.0% less) | $1,896.20 | $266.00 | Month 23 | Month 26 | +$2,590 | +$8,641 | +$24,709 |
| 6.00% (1.5% less) | $1,798.65 | $363.55 | Month 17 | Month 17 | +$7,310 | +$16,766 | +$42,291 |
"Ahead" is the refinance's lead over keeping the old loan if you sold or paid off at that point: what each path has paid, what it still owes, and the cash it has invested, all counted.
The 1% cut is ahead from month 26, 2 years 2 months in. Counting interest alone, with no return on cash, it is month 25 (open the interest-only scenario); the two measures land close together here because the cut is large. The cost ÷ saving rule of thumb says month 23, and it is never later than the real answer, and early at the two smaller cuts: a lower payment on a longer term is partly interest saved and partly principal repaid more slowly, and the rule counts both as savings. Mortgage refinance break-even works through why.
The half-point cut needs 4 years 8 months to get ahead, and three years in it is still -$2,142. The 1.5% cut is ahead in 1 year 5 months. If you expect to sell or refinance again within three years, only the larger cuts pay; by five years all three are ahead. Open the half-point scenario · the 1.5-point scenario.
The reset: a smaller cut can cost more interest, not less
The old loan has 27 years to run. Each refinance restarts a 30-year clock, 3 years longer, and charges interest for all of it on a balance that falls more slowly. Paid on schedule to the end:
| Interest to payoff | Versus keeping the old loan | Lead at the end, interest only | |
|---|---|---|---|
| Keep the old loan | $400,553 | — | — |
| 7.00% over 30 years | $418,527 | +$17,974 | -$23,973 |
| 6.50% over 30 years | $382,633 | -$17,920 | +$11,920 |
| 6.00% over 30 years | $347,515 | -$53,038 | +$47,039 |
At half a point, the extra years outweigh the lower rate: the refinance pays +$17,974 more interest than the old loan would have, and on interest alone its lead peaks and is gone by month 260 (21 years 8 months). It is a good deal for a borrower who sells in year 8 and a poor one for a borrower who stays to the end. The 1% and 1.5% cuts save interest even with the reset. With the saving invested at 4% the end-of-term picture is kinder to every row, because the money not paid to the lender early is earning something; it is the interest-only column that shows the reset plainly.
The fix: keep paying the old payment
The calculator's "keep the old payment" switch puts the $2,162.20 you already pay onto the new loan, so the whole saving prepays principal:
| New loan paid off in | Sooner than the old loan by | Interest to payoff | Saved, net of costs | Break-even | |
|---|---|---|---|---|---|
| 7.00% | 23 years 9 months | 3 years 3 months | $316,116 | $78,437 | Month 51 |
| 6.50% | 21 years 6 months | 5 years 6 months | $257,361 | $137,192 | Month 25 |
| 6.00% | 19 years 10 months | 7 years 2 months | $212,991 | $181,562 | Month 17 |
Now the half-point cut saves $78,437 after closing costs and ends 3 years 3 months before the old loan would have, for the same monthly outlay. The break-even is no later than when the saving is pocketed, because prepaying a 7.00% loan earns more than the 4% the saving would otherwise make. Open the half-point, payment-kept scenario · the 1%, payment-kept scenario.
Does the balance matter?
Less than it looks. With closing costs at 2% of the balance, a 1% cut breaks even in the same month at every size, because the saving and the costs scale together. What changes is the dollars at stake:
| Balance | Closing costs | Saving a month | Break-even | Ahead after 5 years | After 10 |
|---|---|---|---|---|---|
| $200,000 | $4,000 | $177.33 | Month 26 | +$5,760 | +$16,473 |
| $300,000 | $6,000 | $266.00 | Month 26 | +$8,641 | +$24,709 |
| $500,000 | $10,000 | $443.33 | Month 26 | +$14,401 | +$41,182 |
Fixed-dollar costs break this symmetry: an appraisal and title work cost about the same on a small loan as on a large one, so in practice a small balance pays a higher percentage and breaks even later. Enter your own Loan Estimate figure rather than a percentage.
Assumptions and limits
- Fixed-rate loans on both sides, interest charged monthly at one-twelfth of the annual rate. The new loan takes exactly today's balance; a cash-out refinance is extra borrowing on top of this comparison.
- Closing costs are 2% of the balance, paid in cash. Points, lender credits and prepaid interest are not separated out; a no-closing-cost offer is covered in No-closing-cost refinance vs paying the costs.
- The return on cash is a constant annual rate, applied both to the closing-cost money the keep path invests and to the monthly saving the refinance path invests. It is an input, not a forecast.
- The break-even month is the first month from which the refinance stays level or ahead for the rest of the comparison, which runs to the end of the longer loan.
- Pre-tax throughout: no mortgage interest deduction, no tax on investment returns. Property tax and insurance are the same with either loan and are left out.
Method and sources
The model is calculateRefinance in the
mortgage refinance break-even calculator. Both loans are amortized month
by month with the standard fixed-rate payment formula. The refinance's lead at a month is every cash
difference between the two paths to that month, closing costs included, grown at the return, plus
the old loan's remaining balance minus the new loan's; at a 0% return that equals interest avoided
minus closing costs. The model was checked against an independently written model of the same
comparison. Every figure above comes from running it on the inputs in the scenario links.
- Freddie Mac, Primary Mortgage Market Survey: 30-year fixed-rate average of 7.03% as of September 24, 2026.
- CFPB: Loan Estimate explainer: the form that itemizes a refinance's closing costs.
- IRS Publication 936, Home Mortgage Interest Deduction: mortgage interest is deductible only when deductions are itemized. Not applied here.
Open this scenario in the calculator
All figures on this page come from the Mortgage Refinance Break-Even calculator. Change any input there and the numbers update.