--- title: You Don't Need a 2% Rate Drop to Refinance — Here’s Why description: You don't need a 2% rate drop to refinance. Experts explain when a small cut, or a non-rate benefit, can still save you money. authors: - name: Aly J. Yale role: Contributing Reporter url: https://money.com/author/aly-j-yale/ bio: Aly J. Yale is a freelance finance journalist with deep experience covering mortgages, real estate and the housing market, as well as investing, lending and retirement topics. She has paid off her student loans, bought two houses, and traveled to seven different countries with her two young sons all through smart money management. For Money, she has researched and written many best of rankings in the housing and mortgage space, including reverse mortgages, VA loans and home equity. Her work in The Wall Street Journal, U.S. News & World Report, Experian, Fortune, Business Insider, CBS and Money.com. education: Texas Christian University at_money_since: 2020 articles: 103 covers: - Mortgages - Banking - Business - Career Advice - Credit - Housing - Identity Theft - Insurance - Loans - Personal Finance - Professional Services - Retirement also_seen_in: - The Wall Street Journal - Business Insider - Yahoo Finance - US News & World Report - CBS social: - https://twitter.com/AlyJwriter - https://www.linkedin.com/in/alyjyale/ editors: - name: Leslie Cook role: Editor, Real Estate url: https://money.com/author/leslie-cook/ bio: Leslie Cook is Money’s lead real estate editor covering trends in the housing market, mortgage rates and real estate. She also writes about home renovation trends and tips. education: Bryn Mawr College, BA History certifications: Certified Personal Finance Counselor at_money_since: 2019 articles: 800 covers: - Mortgages - Banking - Credit - Economy and Politics - Housing - Identity Theft - Insurance - Loans - Personal Finance - Professional Services - Retirement - Taxes social: - https://twitter.com/LeslieLCook - https://www.linkedin.com/in/leslie-cook-9829b9198/ published: '2026-10-21T12:32:22.000Z' section: Mortgages word_count: 1092 canonical: https://money.com/refinance-small-rate-drop/ type: Article source: structured-blocks --- > **Disclosure:** We earned a fee from a featured brand for publishing this content. Compensation does not determine ranking. Not all brands are included. [Learn more](https://money.com/page/disclaimer/). ![Father cleaning dishes at home with his two daughters](https://img.money.com/2026/09/Sponsorship-Refi-Survey-Coverage.jpg) ## Quick Summary - Refi.com's Kyle Bass says a 1% rate cut generally recovers closing costs but isn't a hard floor. - Refinancing a $500,000 loan from 7% to 6.75% saves about $85 per month. - Refinance closing costs typically run 2% to 5% of the loan. Divide that by your monthly savings to find your break-even point. Refinancing your mortgage can often be a smart way to snag a lower interest rate and reduce your costs as a homeowner. But securing a large rate reduction is hard these days. With average mortgage rates hovering around 7%, many borrowers won’t save much by refinancing. Still, that doesn’t mean refinancing isn’t smart for some borrowers. In fact, refinancing can still save you money in plenty of ways, even without a hefty rate cut. ## Even a small rate drop can make a big difference When it comes to refinancing, there’s no hard-and-fast threshold for what rate reduction makes the move worth it. Some will tout a 1% or 2% drop as the ideal target, but what matters for one borrower may not for another. It depends on your loan amount, interest rate, and personal financial situation. Kyle Bass, production business manager at Refi.com, says there's a good reason to set 1% as the ideal rate drop when refinancing a loan. “This type of spread generally gives you enough monthly savings to recover your closing costs within a reasonable timeframe and still come out ahead in the long run," Bass says. "That said, I don't think it should be treated as a hard floor.” In fact, on a larger loan balance, even a fraction of a percentage point reduction can make a huge difference. Take a $500,000 loan, for instance. On a mortgage of this size, a 7% interest rate would give you a payment of $3,326 (not including taxes and insurance) and cost you nearly $700,000 in interest over 30 years. Reduce that interest rate to 6.75%, though, and your payment drops by about $85 per month. You pay around $30K less in interest. Some of today’s borrowers also have room for small improvements. According to a [survey](https://www.refi.com/learn/refinancer-mindset-data/) from Refi.com, nearly half of participants have current interest rates over 6%. “My advice is always to run the actual math for your specific situation rather than anchoring to a rule of thumb,” Bass says. ## You can lower your payment in other ways Six in 10 homeowners want a lower monthly payment, according to the same Refi.com survey. While reducing your interest rate is one way to do that, a refinance can also lower your costs in other ways. According to Jeremy Schachter, branch manager at Fairway Home Mortgage in Phoenix, consider factors beyond a rate reduction when evaluating a refinance, such as eliminating mortgage insurance or paying off higher-interest debt. For example, if you have an FHA loan and have now built up at least 20% in equity (meaning your loan balance is 80% or less than your home’s value), then you can refinance into a conventional loan and remove your Mortgage Insurance Premium. This costs anywhere from 0.45% to 1.05% of your loan amount annually, spread across your 12 monthly payments, and can save some borrowers significant money. You could also refinance into a longer loan term to reduce your payment. For instance, if you have 20 years left on your loan but refinance into a new 30-year loan, it would spread your balance across more time, lowering your monthly payment. Just keep in mind that it will extend your payoff time and could cost more in interest. ## There are other money-saving benefits, too Refinancing can also offer other perks. For example, if you have a lot of high-interest debt, using a cash-out refinance to pay it off can often save you money in the long run. This is because mortgages tend to have much lower rates than other forms of consumer debt, like credit cards and personal loans. (The average credit card rate is currently just under 21%, according to the Federal Reserve). “Credit card rates are hovering near 20%, so trading that debt for a mortgage rate, even in the 7% range, is still a significant financial shift,” Bass says. Refi.com’s survey shows that 13% of homeowners want to do just that. Another 15% want to access equity for other reasons, like improving their home or making repairs. “If you are looking to do a home remodel, a cash-out refinance may make sense before doing a home equity loan or line of credit,” says Schachter. “Second mortgages like HELOCs usually have higher rates than a cash-out refinance on your current mortgage.” Finally, for borrowers with adjustable-rate mortgages, refinancing can help them move into a more stable, fixed-rate loan. This is particularly important as the Federal Reserve has recently hiked interest rates. If the Fed continues raising rates, mortgage rates and monthly payments for ARM borrowers could rise down the road. “Going into a volatile market with an adjustable rate mortgage can quickly price you out of the home that you work so hard to make yours,” says Chris Parks, sales manager at Churchill Mortgage. “I’m seeing clients move away from that product during this window and into fixed-rate mortgages." ## Two rules of thumb Ultimately, experts say two things to remember if you’re considering a refinance these days: First, make sure you’ll be in the home long enough to break even on your refinancing costs. Most refinances cost 2-5% of the loan amount in closing costs. Calculate this, then divide it by how much the refinance will save you each month. The result will tell you how many months it will take to break even. “The payback period is huge because you have costs that go into making a refinance happen,” says Parks. “You also need to look at how long you plan on being in the home, because if your goal is to move to another state to be with family in 24 months and the payback period is four years, your refinance is ultimately going to cost you money down the road.” You should also keep in mind that you can refinance as many times as you want. You can refinance now and, if rates drop a few years down the road, refinance again to lower your payment even further. Parks has used this approach before: He refinanced in 2013 to ease financial pressure, and then again a few years later when rates dropped. “While that was not a perfect strategy, it worked. I continued with my plan and was able to pay my house off in full in less than 17 years," he says. While this tactic might help solve an immediate problem, Bass cautions that you have to be careful about refinancing multiple times. 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