The basic formula
The break-even point is how long it takes for what you save each month to add up to what the refinance cost you. In its simplest form:
- Break-even (months) = total refinance costs ÷ monthly savings
As an illustration: if a refinance costs $4,800 and lowers your monthly payment by $200, you break even after 24 months. If you keep the new loan longer than that, the refinance has paid for itself; if you sell or refinance again sooner, it has cost you money.
That simple version is a useful first check. It can also be misleading, for the reasons below.
Why a lower monthly payment can mislead
Monthly savings mix two things together: a lower interest rate, and a longer time to repay. If you are 5 years into a 30-year mortgage and refinance into a new 30-year loan, part of the lower payment comes simply from spreading the remaining balance over 30 years instead of 25.
That can still be the right choice if you need the cash flow. But it means the payment comparison flatters the refinance. Two better comparisons:
- Total interest you will pay over the time you actually expect to keep the loan, under each option.
- The payment on a new loan with a term close to what you have left, so the rate is the only thing that changes.
What to count as the cost of refinancing
Use the costs of the new loan itself: lender origination and processing fees, any discount points, the appraisal, title insurance and settlement fees, and recording fees. Your Loan Estimate lists these.
Some cash you bring to closing is not really a cost of refinancing. Prepaid interest and the deposit into a new escrow account for taxes and insurance are money you would be paying anyway, and the old lender refunds the balance of your old escrow account after the payoff. Counting them as costs makes the break-even look later than it is.
A "no-closing-cost" refinance still has costs. They are paid through a higher interest rate or added to the loan balance, so the break-even question becomes whether the higher rate or larger balance still leaves you ahead.
Other things that move the break-even point
- How long you will keep the loan. This matters more than anything else. A move, a job change or a likely future refinance all shorten it.
- Mortgage insurance. If the new loan comes in at a low enough loan-to-value, a refinance can remove mortgage insurance you are paying today, which adds to the monthly savings.
- Discount points. Paying points lowers the rate but raises the upfront cost, which pushes the break-even out. Points are worth it only if you keep the loan well past their own break-even.
- Cash out. Taking cash out raises the new balance, so the payment comparison is no longer like for like.
Running the numbers
The Home Refinance Calculator takes your current balance, rate and remaining term, the new loan amount, rate and term, and the estimated closing costs. It shows the break-even point, the monthly payment before and after, total interest saved over the loan term, and the net benefit at any future date you choose. You can also enter your monthly mortgage insurance, so the calculation counts insurance the refinance removes early.