How to Work Out Your Refinance Break-Even Point
Break-even months = total refinance costs ÷ monthly payment saving. If you will keep the loan longer than that, refinancing usually saves money; if you may sell or refinance again sooner, it may not.
Example: $6,000 of costs and a $250 monthly saving break even after 24 months.
Refinancing replaces your mortgage with a new one, usually to get a lower rate. It has upfront costs, such as lender fees, valuation, legal or title fees and any early repayment charge on the old loan.
The formula
Worked example
You owe $300,000 with 25 years left at 7.00%: the payment is about $2,120 a month. A new 25-year loan at 6.00% costs about $1,933, saving roughly $187 a month. With $5,000 of costs, break-even is 5,000 ÷ 187 ≈ 27 months.
Traps that change the answer
- Resetting the term. Moving from 25 to 30 years lowers the payment but can raise total interest. Compare total interest, not only the monthly figure.
- Rolling costs into the loan. You avoid paying cash but pay interest on the costs.
- Early repayment charges on the old loan count as a cost.
- Time horizon. If you might move before break-even, the refinance loses money.
The term-reset trap in numbers
Same $300,000 balance with 25 years left at 7.00%:
| Option | Monthly payment | Interest still to pay |
|---|---|---|
| Keep current loan (7%, 25 years) | $2,120.34 | $336,101 |
| Refinance to 6%, 25 years | $1,932.90 | $279,871 |
| Refinance to 6%, new 30 years | $1,798.65 | $347,515 |
The 30-year option has the lowest payment but costs more interest than staying put, before closing costs are counted. Keeping the remaining term, or paying the old payment amount on the new loan, keeps the saving real.
Quick break-even table
| Closing costs | $100/month saved | $200/month saved | $300/month saved |
|---|---|---|---|
| $3,000 | 30 months | 15 months | 10 months |
| $6,000 | 60 months | 30 months | 20 months |
| $9,000 | 90 months | 45 months | 30 months |
Try it
The Talreon refinance break-even calculator does the sums for your own loan.
Frequently asked questions
How do I calculate a refinance break-even point?
Divide the total refinance costs by the monthly payment saving. The result is the number of months to break even.
Is a 2-year break-even good?
It can be if you expect to keep the new loan well beyond 2 years. If you may sell sooner, the refinance may cost more than it saves.
Should I include closing costs added to the loan?
Yes. Costs rolled into the loan still count, and you also pay interest on them.
What costs count toward refinance break-even?
All the costs of the new loan: lender and origination fees, appraisal, title and settlement fees, any points you buy, and any prepayment penalty on the old loan. Leave out escrow deposits, because that money still belongs to you.
Sources
- CFPB: what are closing costs?
- CFPB: what is a cash-out refinance?
- CFPB: things to consider when refinancing
Related calculators
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