The Rate Lock Dilemma: Should You Refinance Your Mortgage?
You're locked in at 6.70%. Rates just dropped to 5.90%. Should you refinance? This guide gives you the exact framework to decide. Real math. Real scenarios. Real answers.
⚡ Quick Answer:
Refinance If: Rates dropped 0.5%+, you'll stay 5+ years, and your credit is good.
Don't Refinance If: Rates only dropped 0.25%, you're moving soon, or refinancing costs are too high.
💡 Pro Tip: Compare refinance rates from 5+ lenders before making any decision. Different lenders have different programs and rates.
The Refinance Math: When It Makes Sense
Let's start with the fundamental question: Does refinancing actually save money?
The answer depends on three factors:
1. How Much Will You Save Per Month?
This is the monthly payment reduction. If you refinance from 6.70% to 5.90%, you save money every month.
2. How Much Will Refinancing Cost?
Refinancing costs $2,000-5,000. This includes appraisal, title, processing, underwriting, and lender fees.
3. How Long Will You Stay?
If you stay long enough, your monthly savings will exceed your refinancing costs. This is your break-even point.
Real Example: $400,000 Loan
Let's do a real refinance calculation. You have a $400,000 mortgage at 6.70% with 25 years remaining. Rates dropped to 5.90%.
| Metric | Current (6.70%) | Refinance (5.90%) | Savings |
|---|---|---|---|
| Monthly Payment | $2,850 | $2,550 | $300/month |
| Total Interest (25 years) | $455,000 | $365,000 | $90,000 |
| Refinancing Costs | - | -$3,500 | -$3,500 |
| Break-Even Point | - | - | 12 months |
| 5-Year Savings | - | - | $15,000 |
The verdict: You save $300/month, break even in 12 months, and save $15,000 over 5 years. Refinancing makes sense.
💰 Ready to refinance? Get refinance quotes from top lenders and see your exact savings.
The Break-Even Calculator: Your Personal Number
Your break-even point depends on your specific situation. Use this formula:
Break-Even Months = Refinancing Costs ÷ Monthly Savings
Example: $3,500 ÷ $300 = 11.7 months ≈ 12 months
Rule of Thumb: If break-even is less than 12 months and you'll stay 5+ years, refinance.
📊 Related Reading: Check out our guide on whether to buy now or wait for more decision frameworks.
The Rate Drop Threshold: How Much Is Enough?
Not every rate drop is worth refinancing. Here's the threshold. For more on mortgage rates, see our 2026 rate predictions.
0.25% Drop
Verdict: Usually NOT worth it. Savings too small. Break-even too long.
0.5% Drop
Verdict: Maybe. Depends on your situation. Calculate your break-even.
0.75%+ Drop
Verdict: Usually worth it. Strong savings. Short break-even.
💡 Pro Tip: Not sure if your rate drop qualifies? Get a free refinance quote to see exact savings.
The Time Horizon: How Long Will You Stay?
This is critical. If you're moving soon, refinancing doesn't make sense. For more on home buying decisions, read our article on affordability challenges for first-time buyers.
| Time Horizon | Refinance? | Why? |
|---|---|---|
| Less than 1 year | NO | You won't reach break-even |
| 1-2 years | MAYBE | Only if rate drop is 0.75%+ (see housing market analysis) |
| 3-5 years | YES | Good savings if rate drop is 0.5%+ |
| 5+ years | YES | Refinance if rate drop is 0.5%+ |
The Credit Score Factor: Has Your Credit Improved?
If your credit improved since you bought, refinancing could save even more money.
Credit Improved (620 → 750)
You might qualify for better rates. Rate drop could be 0.5-1.0% better than market average. Refinance!
Credit Stayed Same
You'll get market rates. Refinance only if market rates are 0.5%+ lower.
Credit Declined
You might not qualify for better rates. Wait until your credit improves.
The Cash-Out Refinance Trap: Don't Fall For It
A cash-out refinance lets you borrow against your home equity. Sounds great. But be careful. For more on mortgage options, check our guide on rate locks and mortgage protection.
⚠️ The Trap:
You refinance $400K at 5.90%, but take out $50K in cash. Now you owe $450K at 5.90%.
You saved on your rate, but you increased your debt by $50K. Your payment might actually go UP.
Rule: Only do a cash-out refi if you have a specific use for the money (home improvement, debt consolidation) and the rate is favorable.
🏠 Considering a cash-out refi? Compare cash-out refinance options from multiple lenders.
The Decision Framework: Should You Refinance?
Use this framework to make your decision:
Question 1: Did rates drop 0.5%+?
NO → STOP. Don't refinance.
YES → Continue to Question 2
Question 2: Will you stay 3+ years?
NO → STOP. You won't reach break-even.
YES → Continue to Question 3
Question 3: Is your credit good (650+)?
NO → Wait to improve credit first.
YES → Continue to Question 4
Question 4: Is your break-even less than 12 months?
NO → Refinancing costs too high. Shop around.
YES → REFINANCE!
The Action Plan: How to Refinance
If you've decided to refinance, here's your action plan:
Step 1: Compare Lenders (Week 1)
Compare refinance rates from 5+ lenders. Different lenders have different rates and fees.
Step 2: Get Loan Estimates (Week 1)
Request loan estimates from your top 3 lenders. Compare rates, fees, and closing costs.
Step 3: Calculate Your Break-Even (Week 2)
Use the formula: Costs ÷ Monthly Savings = Break-Even Months. Make sure it's less than 12 months.
Step 4: Lock in Your Rate (Week 2)
When you find a good rate, lock it in. Rates can change daily.
Step 5: Complete the Refinance (Week 3-4)
Submit documents, get appraisal, and close on your refinance. You're done!
The Bottom Line: Refinance Smart
Refinancing can save you thousands of dollars. But only if you do it right.
The rules:
- Rates must drop 0.5%+
- You must stay 3+ years
- Your credit must be good
- Break-even must be less than 12 months
If all four conditions are met, refinance. You'll save money.
💰 Compare Refinance Rates
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