Mortgage rates have dropped quite a bit from where they were a few months ago. Not long ago, rates were up around 7%. This week, they're closer to 6.34%.

While that may seem like a subtle drop, if you bought a home when rates were near 7%, you might be wondering when it makes sense to refinance.

Is a drop from 7% to 6.34% enough to make a real difference? Or should you wait for rates to fall even more before making a move?

Let's look at an example to see how this plays out.

Say you bought a $400,000 home and put $80,000 down. That leaves you with a $320,000 mortgage at a 7% fixed rate for 30 years.

Your monthly payment would be about $2,128. Over 30 years, you'd pay roughly $766,000 total, with about $446,000 of that going to interest.

Now, let's say rates drop to 6.34% and you refinance the same loan amount. Your new payment would be about $1,989, saving you around $139 each month.

Over the life of the loan, you'd pay about $716,000 total, with $396,000 in interest. That's about $50,000 less in interest compared to your original loan.

So, how do you know if refinancing is the right move?

Let's walk through another example.

Suppose it costs $5,000 to refinance. How long would it take to make that money back with your $139 monthly savings?

$5,000 divided by $139 is about 36 months, or three years.

That's your break-even point.

If you plan to stay in your home less than three years, refinancing probably doesn't make sense.

If you stay about three years, you'll just about break even.

But if you plan to stay longer, that's when refinancing can really start to save you money.

There's no single rule for when to refinance, and there are other things to think about.

But knowing the numbers can help you make a smart decision. If you're thinking about refinancing, I recommend talking to a lender. If you'd like a referral, just let me know.