When Does a Refi Make Sense?

Important context for 2026: If you purchased or refinanced your home in 2020–2022 and locked in a rate of 3%–4%, you have an extraordinarily favorable mortgage. In the current rate environment, refinancing would likely be a significant mistake — you would be trading a historically low rate for one that is nearly double. The guidance below is most relevant to those who currently carry rates of 8% or higher, or who have a compelling non-rate reason to refinance (e.g., removing a co-borrower, shortening the term, or tapping equity).

Here’s what we know about refinancing:

• It costs money to initiate a new mortgage — as much as 3% to 5% of the mortgage itself. There are lots of costs involved, including application fees, title search, title insurance, appraisal, transfer taxes, and so on. Typically people roll these into the new mortgage. It would take a few years of payments on the new mortgage to get the balance back down to what it was before the refi. Of course, if you have the cash, you can come out of pocket for these expenses.
• If you do refinance, take a fixed rate, not a variable rate. There is real risk in a variable rate — we don’t know what will happen to rates in the future. I remember the late 1970s when people were taking out mortgages at 16% or more. Locking in certainty is almost always the wiser choice.
• There is a 2% rule of thumb that is largely true — it makes sense to refi when there is at least a 2% drop from your current rate to the new one. Refi for a lower payment if you need to, but we’d prefer you to refi to a shorter payoff period and keep your payment roughly the same.
• If you’re down to the last 5–7 years of your mortgage, you’re paying very little interest — mostly principal. It generally won’t make sense to refi in that situation.
• The closing costs mean there is always a break-even period — typically several years. If you don’t plan to stay in the home long enough to recoup those costs through monthly savings, refinancing doesn’t pencil out.

We know several terrific mortgage brokers we’re happy to recommend. Please know that if we do make a referral, there is no quid pro quo — we never pay nor receive referral fees.

You may also find the following piece useful:  The 15 Year Mortgage