Is it Worth Refinancing For a .25%, .50% or 1% Lower Rate?
A simple rule of thumb is the larger your loan balance, the less your rate has to drop to make a refinance worth it.
For instance, someone with a $750,000 loan saves over $125 per month by dropping their rate just 0.25%
Someone with a $200,000 would have to drop their rate by 1% to save the same amount.
As rates potentially creep down in 2024, you could have many opportunities to drop your rate by 0.25%, 0.50%, or even 1.0%.
So, as in many financial decisions, the answer to whether you should refinance is “it depends.” Here’s what to consider.
Monthly savings
The following table details how much you could save at various loan amounts and rate reductions.
Keep in mind that this is an estimate only and your savings could depend on your original loan amount, current loan amount, whether you include closing costs into the new loan, and how long you’ve had your loan.
Monthly Savings by Rate Reduction* | |||
Current loan | 0.25% | 0.50% | 1.00% |
$75,000 | $13 | $25 | $50 |
$100,000 | $17 | $34 | $67 |
$125,000 | $21 | $42 | $84 |
$150,000 | $26 | $51 | $101 |
$175,000 | $30 | $59 | $118 |
$200,000 | $34 | $68 | $134 |
$225,000 | $38 | $76 | $151 |
$250,000 | $43 | $85 | $168 |
$275,000 | $47 | $93 | $185 |
$300,000 | $51 | $102 | $201 |
$325,000 | $55 | $110 | $218 |
$350,000 | $60 | $119 | $235 |
$375,000 | $64 | $127 | $252 |
$400,000 | $68 | $136 | $269 |
$425,000 | $72 | $144 | $285 |
$450,000 | $77 | $153 | $302 |
$475,000 | $81 | $161 | $319 |
$500,000 | $85 | $170 | $336 |
$550,000 | $94 | $187 | $369 |
$600,000 | $102 | $203 | $403 |
$650,000 | $111 | $220 | $436 |
$700,000 | $119 | $237 | $470 |
$750,000 | $128 | $254 | $504 |
$800,000 | $136 | $271 | $537 |
$850,000 | $145 | $288 | $571 |
$900,000 | $153 | $305 | $604 |
$950,000 | $162 | $322 | $638 |
$1,000,000 | $170 | $339 | $671 |
$1,100,000 | $187 | $373 | $739 |
$1,200,000 | $204 | $407 | $806 |
$1,300,000 | $221 | $441 | $873 |
$1,400,000 | $239 | $475 | $940 |
$1,500,000 | $256 | $509 | $1,007 |
$1,600,000 | $273 | $543 | $1,074 |
$1,700,000 | $290 | $577 | $1,141 |
$1,800,000 | $307 | $610 | $1,209 |
$1,900,000 | $324 | $644 | $1,276 |
$2,000,000 | $341 | $678 | $1,343 |
Breakeven point
Many refinance applicants look at “breakeven point” to determine whether a new loan is worth it. The breakeven point is when cumulative monthly savings match closing costs.
It’s very hard to break even on a small loan amount. There are certain fixed costs that don’t change much: the appraisal, escrow fee, and other costs are similar for a $100,000 loan as they are for a $500,000 loan.
However, it still may be worth refinancing a small loan. Sometimes you can roll your closing costs into the new loan and still have 1) a lower payment and; 2) lifetime interest savings.
Looking at strictly monthly savings versus refinance costs, here are breakeven points in months.
Breakeven Months by Rate Reduction** | |||
Current loan | 0.25% | 0.50% | 1.00% |
$75,000 | 548 | 275 | 139 |
$100,000 | 411 | 206 | 104 |
$125,000 | 329 | 165 | 83 |
$150,000 | 274 | 138 | 69 |
$175,000 | 235 | 118 | 60 |
$200,000 | 205 | 103 | 52 |
$225,000 | 183 | 92 | 46 |
$250,000 | 164 | 83 | 42 |
$275,000 | 149 | 75 | 38 |
$300,000 | 137 | 69 | 35 |
$325,000 | 126 | 64 | 32 |
$350,000 | 117 | 59 | 30 |
$375,000 | 125 | 63 | 32 |
$400,000 | 117 | 59 | 30 |
$425,000 | 110 | 56 | 28 |
$450,000 | 104 | 52 | 26 |
$475,000 | 99 | 50 | 25 |
$500,000 | 94 | 47 | 24 |
$550,000 | 85 | 43 | 22 |
$600,000 | 78 | 39 | 20 |
$650,000 | 72 | 36 | 18 |
$700,000 | 67 | 34 | 17 |
$750,000 | 63 | 31 | 16 |
$800,000 | 59 | 29 | 15 |
$850,000 | 55 | 28 | 14 |
$900,000 | 52 | 26 | 13 |
$950,000 | 49 | 25 | 13 |
$1,000,000 | 59 | 29 | 15 |
$1,100,000 | 53 | 27 | 14 |
$1,200,000 | 49 | 25 | 12 |
$1,300,000 | 45 | 23 | 11 |
$1,400,000 | 42 | 21 | 11 |
$1,500,000 | 39 | 20 | 10 |
$1,600,000 | 37 | 18 | 9 |
$1,700,000 | 35 | 17 | 9 |
$1,800,000 | 33 | 16 | 8 |
$1,900,000 | 31 | 16 | 8 |
$2,000,000 | 29 | 15 | 7 |
Reduce your rate while achieving other goals
The numbers above shouldn’t be your only deciding factors. There are plenty of other reasons to refinance. If you can drop your rate a bit, it’s icing on the cake.
Combine the following goals with your rate reduction:
Get cash out for home improvements, debt consolidation, or large one-time costs
Pay off a high-rate HELOC
Get out of a hard-money loan or other short-term financing
Change a 30-year fixed to 15-year to save on lifetime interest
Convert a 15-year to 30-year to lower the monthly payment
Refinance an adjustable-rate mortgage to a fixed
Remove FHA mortgage insurance with a conventional loan
Remove PMI from a conventional loan
The list goes on. The point is you might as well accomplish many financial goals at once with a refinance if at all possible.
Watch rates in 2024. You may have some very good opportunities to save money and shore up your finances.
*Assumes current rate of 7.5%.
**All calculations assume $7,000 in closing costs for loans $75k-$350k, $8,000 in closing costs for loans $375k-$950k, $10,000 in closing costs for $1M+. Your closing costs will vary.
