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When Should You Refinance Your Mortgage? A 2026 Guide

·7 min read

If you bought a home in the last few years, you've probably wondered when to refinance your mortgage. The honest answer: it depends on three things — how much rates have dropped, how long you'll stay in the home, and how much it costs to close the new loan. This guide walks through each one with real numbers.

The classic "1% rule" — and why it's outdated

For decades, lenders told homeowners to refinance when rates dropped at least 1% below their current rate. That rule of thumb still works on bigger loans, but on a $200,000 mortgage a 0.5% drop can also pay off quickly. The better question is: how long until the monthly savings repay the closing costs?

The break-even calculation

Refinancing typically costs 2%–5% of the loan amount in closing fees (appraisal, title, origination, recording). To find your break-even point:

  1. Estimate your new monthly payment at the lower rate.
  2. Subtract it from your current payment to get monthly savings.
  3. Divide total closing costs by the monthly savings.

Example: $4,500 in closing costs ÷ $180/month savings = 25 months to break even. If you plan to stay in the home longer than that, refinancing makes sense.

5 signals it's time to refinance

  • Rates dropped 0.5%–1%+ below your current rate. Set a target and let an alert service watch the market for you.
  • Your credit score improved significantly. Moving from a 680 to a 760 can unlock a better tier even if market rates haven't moved.
  • You want to drop PMI. If your home value has risen and you now have 20%+ equity, refinancing kills mortgage insurance.
  • You want to switch from ARM to fixed. Locking in a fixed rate before an adjustment period removes payment risk.
  • You want to shorten the term. Going from 30 years to 15 years often means a lower rate and faster payoff.

When refinancing is a bad idea

Skip the refi if you plan to sell within 1–2 years, your new closing costs would be rolled into a much larger loan balance, or you'd be restarting a 30-year clock when you're already 20 years in.

The simplest move: set a target and wait

You don't need to check rates every morning. Set the rate you'd refinance at, and let a free service like Mortgage Refinance Reminder email and text you the moment 30-year fixed rates hit your number.