A useful rule of thumb is that if a refinance can lower your interest rate by 1% or more, it likely makes good financial sense. However, the best way to determine for sure whether a refinance is in your best interest is to calculate your break-even point. To do this, just divide your total closing costs by your estimated monthly savings. The result is the number of months it will take you to benefit from the refinance savings.
For example, if a refinance saves you $150 on your monthly payment but costs you $5,000 in fees, the break-even point would be about 33 months, or just under three years ($5,000/$150 = 33.33). As long as you plan to stay in your home for at least three years, the refinance saves you money.
The Consumer Financial Protection Bureau (CFPB) recommends that you only refinance if you can “break even” within two years. However, as long as you’re planning to live in your home beyond the break-even point, a refinance won’t be detrimental to your finances. The longer you retain the home after refinancing, the more savings you’ll see.