When does refinancing actually make sense?

You have probably heard that you should refinance when rates fall 1% below your current rate. It is a tidy rule, but it ignores the two things that matter most: how much the refinance costs and how long you will keep the new loan. A 0.5% drop can be a great deal. A 1.25% drop can be a waste if you are moving next year.

Start with the break-even month

Your break-even point is the number of months it takes for monthly savings to cover the cost of refinancing.

Break-even months = total closing costs divided by monthly savings.

If a refinance costs $4,800 and lowers your payment by $210 per month, you break even in about 23 months. If you plan to stay in the home for at least three more years, the refinance likely makes sense. If you might relocate for work within a year, it probably does not.

Look at total interest, not just the payment

A lower payment can hide a higher lifetime cost. Suppose you are six years into a 30 year loan and refinance into a new 30 year loan. Your payment drops, but you have added six years of payments. Two ways to avoid that trap:

• Choose a shorter term, such as 20 or 15 years, if the payment still fits.
• Keep your new 30 year loan but pay the old payment amount each month, so the extra goes to principal.

Our refinance savings calculator shows monthly savings and break-even together so you can see both sides.

Good reasons to refinance besides rate

Removing FHA mortgage insurance

Many Utah homeowners who bought with FHA in 2020 to 2023 have gained substantial equity. Refinancing into a conventional loan at 80% loan-to-value or less can remove mortgage insurance entirely, sometimes saving $150 to $300 per month even if the rate is similar.

Moving from an adjustable to a fixed rate

If your ARM is approaching its first adjustment, locking a fixed rate can remove uncertainty. Compare the likely adjusted rate with today's fixed options.

Removing a co-borrower

After a divorce, or when parents co-signed for a first home, a refinance can remove a borrower from the loan.

When waiting is smarter

• You are within a few years of payoff. Most of your payment is already principal, so savings are small.
• Your credit score recently dropped. Give it a few months to recover so you get better pricing.
• You might move soon. If you will not reach break-even, skip it.
• Your current rate is already low. If you need cash, a HELOC may let you keep that rate.

What a refinance typically costs

In our sample pricing, lender fees are a flat $995. Third-party costs include appraisal (often waived), title insurance, recording fees and prepaid interest. For a $380,000 refinance in Salt Lake County, total costs commonly land between $3,500 and $5,500 before any discount points. You can also choose a no-closing-cost option with a slightly higher rate, which shortens break-even to zero months.

Set a rate watch

If the numbers do not work today, you do not need to keep checking rates. Tell us your target payment or rate and we will contact you when a refinance clears your break-even goal. Start with a quick pre-qualification or call a loan officer to set it up.

Examples are illustrative and not a commitment to lend. Your savings depend on your loan terms, credit and closing costs.