When Should You Refinance Your Mortgage?

A lower mortgage payment can help your budget, but refinancing adds costs and may change how quickly you repay principal. Compare the current loan and new offer over the same period before deciding.

Here's how to know if your situation actually justifies a refinance in 2026.

The "1% rule" is outdated

For decades the rule of thumb was: refinance when rates drop 1% below your current rate. With today's loan sizes and closing costs, the rule depends more on three things:

• How much you owe and the size of the rate change
• How long you'll keep the loan
• Whether you'll roll closing costs into the loan or pay out of pocket

Start with payment break-even, then compare total cost

Net refinance costs ÷ monthly payment savings = simple payment break-even. This is a useful first check when savings are positive and stable. It does not account for a different loan term, financed costs and their interest, or the principal balance remaining when you sell or refinance again.

Example: $5,000 in net costs and $180 in monthly savings gives about 28 months ($5,000 ÷ $180). At 18 months, those savings would not yet recover the costs. Staying beyond 28 months alone does not establish an overall saving: compare payments, upfront costs, and remaining balances at your planned exit date. Keep refundable escrow deposits separate from fees when comparing costs.

Four reasons to compare a refinance

1. Rate-and-term refinance.Compare today's quote with your current loan, including costs and how long you expect to keep the new loan.
2. Cash-out refinance.You need cash for a renovation, debt consolidation, or another property. You're trading a higher loan balance and possibly a higher rate for liquidity. Compare the full cost and repayment period. Moving unsecured debt into a mortgage also puts your home at risk if you cannot repay.
3. Remove PMI. Ask your servicer about cancellation before paying to refinance. For many Conventional loans, you can request cancellation at 80% of the original value, subject to payment history and other conditions. Automatic termination generally occurs at the scheduled 78% of original value if payments are current. Appreciation-based cancellation follows separate investor and servicer rules. These thresholds do not describe FHA insurance.
4. Remove a co-borrower. Divorce, business partnership ending, or buying out a parent may call for a refinance. Also ask the servicer whether an assumption or release of liability is available. Removing a name from title alone does not release the debt.

See the CFPB's PMI cancellation guidance for conditions and the meaning of original value.

Texas-specific: cash-out has its own rules

Cash-out lending secured by a Texas homestead may fall under Section 50(a)(6) of the state constitution. Confirm how the rules apply to your property and existing debt. Key requirements include:

• The new loan plus other secured debt cannot exceed 80% of the home's fair market value.
• Generally, one year must pass after an existing Section 50(a)(6) loan closes, subject to statutory exceptions.
• Closing generally cannot occur until at least 12 days after the later of the application or required notice; other disclosure timing rules also apply.
• Refinancing into a non-home-equity loan under Section 50(f)(2) requires more than waiting one year. The 80% limit, restrictions on additional funds, and required notice must also be satisfied.

Source: Texas Constitution, Article XVI, Section 50.

The practical impact: Texas cash-out is more restrictive than most states. If you're tapping equity for the first time, run the math before assuming you can pull out 90% of your home's value the way some other states allow.

Reasons to look more closely before refinancing

• You plan to move before the savings recover your refinance costs
• You'd be resetting a 30-year clock at year 22 of your existing loan (the new amortization can cost more than the rate saves)
• You are unlikely to recover the costs during your expected time in the loan
• Your credit score has dropped since the original loan and you'd qualify for a worse rate

The decision in 5 minutes

Pull these numbers:

• Current rate
• Current balance
• Months remaining on the loan
• Today's rate quote (we'll provide on the pre-qual)
• Estimated closing costs (lender + title + recording)

Compare the same holding period for both loans. Include payments, costs, and the balance left at the end; a lower payment from restarting a longer term can still cost more overall.

The TL;DR

Payment relief and lower total cost are different goals. We compare both, using current quotes and the time you expect to keep the loan. A future rate drop or another refinance should not be assumed.

For a fresh quote and your specific break-even calc, start a pre-qualification — same-day response.

This article is general educational information, not personalized loan advice. Loan terms, rates, and program guidelines change. Speak with a licensed loan officer before making borrowing decisions.