.svg)
Mortgage rates have been on a rollercoaster in recent years. Many homeowners are left wondering if they should refinance their mortgage or hold their current loan. With rates shifting up and down, the decision can feel complicated. Refinancing can save you money, but it is not always the right move. The key is understanding when refinancing makes sense and when staying put is worth consideration.
This article breaks down the major factors you should consider before refinancing, explains the costs involved, and offers a simple guideline you can apply when rates change. The goal is to give you clarity so you can make an informed decision that aligns with your financial goals.
What Does It Mean to Refinance a Mortgage?
Refinancing means replacing your current mortgage with a new one, usually to secure a lower interest rate or adjust loan terms. Homeowners often refinance to:
• Lower their monthly payment by reducing the interest rate
• Pay off the loan faster by shortening the term
• Switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan
• Tap into home equity for cash (cash-out refinance)
While refinancing can be beneficial, it comes with costs. Closing costs typically range from 2% to 5% of the loan balance, so careful evaluation is necessary [1].
________________________________________
The Break-Even Rule
One of the clearest ways to decide whether refinancing is worthwhile is to calculate your break-even point. This is the time it takes for your monthly savings from refinancing to cover the upfront costs.
How to Calculate Your Break-Even Point
1. Add up the refinancing costs (closing fees, appraisal, title insurance, and lender fees).
2. Calculate your new monthly payment compared to your old payment.
3. Divide the total refinancing costs by your monthly savings.
Hypothetical Example: If refinancing costs $5,000 and you save $200 per month, your break-even point is 25 months. If you plan to stay in your home longer than that, refinancing may make sense.
________________________________________
When Refinancing Usually Makes Sense
There are a few situations where refinancing is often a sound choice.
Significant Rate Drop
A common rule of thumb is that refinancing may be worthwhile if you can lower your rate by at least 0.75% to 1% [2]. However, the true answer depends on how long you plan to stay in the home and your break-even calculation.
Shortening the Loan Term
Moving from a 30-year loan to a 15-year loan can save you substantial interest over time. While your monthly payments may increase, you build equity faster and pay off your home sooner [3].
Switching from ARM to Fixed
If you currently have an adjustable-rate mortgage and rates are expected to rise, refinancing into a fixed-rate mortgage can provide stability and predictability [4].
Cash-Out Refinance
If you need funds for major expenses such as home renovations, refinancing allows you to tap into equity. However, this increases your loan balance and may extend repayment, so proceed cautiously [5].
When It May Be Better to Hold Your Current Loan
Refinancing is not always beneficial. In some cases, keeping your current mortgage may be the better choice.
High Closing Costs vs. Small Savings
If the monthly savings are minimal and it would take many years to recoup closing costs, refinancing may not be worthwhile.
Short Time Horizon
If you plan to sell your home in the next few years, you may not reach your break-even point.
Losing Favorable Terms
If you have already paid down much of your mortgage and are several years into a fixed-rate loan, refinancing may reset your repayment schedule and result in more total interest paid.
Impact on Credit Score
Applying for a refinance triggers a hard credit inquiry, which can temporarily affect your credit score. If you are preparing for another major credit need, such as buying a car, this may be a factor [6].
A Simple Guideline for Homeowners
When rates move, it helps to apply a straightforward test:
1. Check the rate drop. Is the new rate at least 0.75% lower than your current rate?
2. Calculate the break-even. Will you stay in the home long enough to recover closing costs?
3. Review your goals. Do you want lower payments, faster payoff, or stability from a fixed rate?
4. Consider your financial picture. Weigh the impact on taxes, credit, and liquidity.
If all four factors align, refinancing may be a strong move. If not, holding your current loan could be a suitable choice.
The Role of Market Conditions
Mortgage rates fluctuate based on Federal Reserve policy, inflation, and bond market trends. In mid-2025, 30-year fixed mortgage rates have hovered around the mid-6% range, which is significantly lower than the peaks of 2022 but higher than historical lows [7]. Because markets are unpredictable, you may want to base your decision on your personal financial situation rather than trying to time the market.
Questions to Ask Before Refinancing
Before making a decision, ask yourself:
• How long do I plan to stay in this home?
• How much will refinancing cost, and how will I pay for it?
• Will refinancing help me meet my broader financial goals?
• Am I comfortable with the risk of resetting my loan term?
Conclusion: Align the Decision With Your Goals
The decision to refinance or hold should not be based solely on headlines about mortgage rates. Instead, it should be grounded in a careful review of costs, savings, and personal goals. The break-even rule provides a simple way to evaluate whether refinancing makes sense for you.
If refinancing lowers your rate substantially, aligns with your time horizon, and supports your long-term goals, it may be the right step for you. If not, staying with your current loan could save you money and stress. Every homeowner’s situation is unique, so reviewing the numbers carefully and seeking professional guidance can help you make the choice that supports your financial future.
Sources
1. Bankrate. "How Much Does It Cost to Refinance a Mortgage?" Updated 2024.
2. Freddie Mac. "Refinance: When Does It Make Sense?" 2024.
3. Kiplinger. "15-Year vs. 30-Year Mortgage: Which Is Better?" 2025.
4. Consumer Financial Protection Bureau. "Fixed vs. Adjustable-Rate Mortgages." Updated 2024.
5. Investopedia. "Cash-Out Refinance: What You Need to Know." 2025.
6. Experian. "How Mortgage Refinancing Affects Credit." 2024.
7. MarketWatch. "Mortgage Rates in 2025: Where Are They Headed?" September 2025.
Disclosures:
Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Investing involves risk which includes potential loss of principal. Past performance is not a guarantee of future results.
All numeric examples and any individuals shown are hypothetical and were used for explanatory purposes only. Actual results may vary.
Neither the companies of OneAmerica Financial, OneIndiana Financial Group, Fuller Financial, nor their representatives provide tax or legal advice. For answers to specific questions and before making any decisions, please consult a qualified attorney or tax advisor.
