Rate-drop scenarios

Refinancing from 7% to 6%: is it worth it?

On these stated assumptions, refinancing from 7% to 6% comes out about $19,964 ahead over a 7-year stay after $6,000 of closing costs.

One point on a $400,000 balance saves real money each month. The break-even test is whether your fee stack lets you reach it.

The stated example

Every number below uses the same example so the scenarios can be compared honestly: a $400,000 balance, 27 years left on the current loan, a new 30-year term, $6,000 of closing costs, and a 7-year stay. Change any of those and the answer can change with it. These are worked examples, not rate quotes.

What drives this particular drop

This is a 1 percentage point drop on a $400,000 balance, which saves $353 a month before costs. Savings scale roughly with balance, while closing costs mostly do not. Halve the balance and roughly the same fee stack has to be repaid from about half the monthly saving, which stretches break-even far beyond the month shown here. Double the balance and the same fees are repaid much sooner. That scaling is why a drop that wins comfortably in this set can fail on a smaller loan with a full fee stack, and why the fee fight matters more as the drop gets smaller.

The second driver is the term restart. This example trades 27 years left for a fresh 30-year term, so part of the payment saving is bought with extra years of payments rather than earned from the lower rate. Read the lifetime interest line before the payment line. Then price the same 6% rate on a 27-year term in the calculator: the payment saving shrinks, the interest saving usually grows, and break-even moves. Both quotes answer real questions; only one of them answers what the loan costs while you hold it.

How sensitive is the answer to closing costs?

Hold every other input at the stated example and vary only the fee stack. This is the negotiation table to bring to a lender: it shows what each thousand dollars of fees does to the same rate drop.

How sensitive is the answer to how long you stay?

Keep the stated $6,000 of closing costs and vary only the stay. Break-even does not move; whether you reach it does. A household that might move in three years should judge this drop on the first row, not the last.

How to judge this drop on your loan

• Scale the balance. Savings grow roughly in proportion to balance; closing costs mostly do not.
• Get the closing cost figure from a Loan Estimate, not an advertisement, and rerun the break-even.
• Ask for the same rate on a term that matches your years left. The payment saving shrinks; the interest saving usually grows.
• Test your earliest realistic move date, not your longest possible stay. The horizon table above shows how quickly the verdict can flip.

Related scenarios

Compare this drop against 7% to 5.5% and 6.5% to 5.5% on the same stated loan, or return to all rate-drop scenarios. If your fee stack is the open question, read lender credits explained before you judge any of them.