Refinance Break-Even Calculator

How refinance break-even works

Break-even is the month a refinance starts to save you money. Before that month, the new loan has cost you more than keeping the old one. After it, the new loan is ahead.

We find it by adding up what each loan costs you, month by month. A loan’s cost is its closing costs plus the interest you have paid so far. Principal is not a cost, because it pays down what you owe. The break-even month is the first month the new loan’s cost is at or below the old loan’s. See the methodology for the full formulas.

The simple method divides your closing costs by your monthly savings. It ignores how fast each loan pays down principal, so it can land in a different month.

In the example, the payment falls from $2,370.52 to $2,135.42, a drop of $235.10. Simple payback is $6,000 ÷ $235.10, or 26 months. Counting interest, you break even in month 31 (2 yr 7 mo). Keep the loan 10 years and you come out about $14,858 ahead.

Why a lower payment can still cost more

A lower payment is not the same as a lower cost. If the new loan runs longer than the years you have left, you pay interest for more years.

In the example you have 27 years left and the new loan is 30. You break even in month 31 (2 yr 7 mo). But the old loan ends in month 324 and the new one keeps going. In month 327 (27 yr 3 mo) the new loan falls behind again. Over the full life of both loans, the 30-year refinance costs $6,702 more in payments and closing costs. That cost only shows up if you keep the loan most of the way to the end.

Now take the same refinance with a 25-year term. The payment drops less, to $2,267.82, a drop of $102.70. Simple payback is 59 months, but counting interest you break even in month 29 (2 yr 5 mo), and the new loan never falls behind. Over the full life it saves $81,703, and after 10 years you are about $21,925 ahead. The price is a higher payment.

Rolling the closing costs into the loan means you pay $0 at closing, but you pay interest on the costs. In the example the new loan starts at $326,000. That moves your break-even to month 37 (3 yr 1 mo) and raises the full-life extra cost to $15,116.

To compare a 30-year offer with a shorter one side by side, use the Mortgage Comparison Calculator. If you want the lower payment without the longer debt, keep the longer loan and add principal each month. The Extra Payment Mortgage Calculator shows how much sooner that pays it off.

When does refinancing make sense?

It makes sense when you break even well before you expect to sell, refinance again or pay off the loan. Compare the break-even month with how long you will keep the loan.

In the example, you break even in month 31 (2 yr 7 mo). Keep the loan 10 years and refinancing pays. Keep it 2 years and it does not: you would be about $1,179 behind.

Rules of thumb that say to refinance once your rate drops by a set amount skip two things: your closing costs and how long you will stay. The same rate drop can pay off for one owner and lose money for another. Run your own numbers. If the new term is longer than the years you have left, read the “Over the full loan” figure too. For more on the kinds of refinance and when to skip one, read our refinancing guide.

What counts as closing costs?

Use the Total Closing Costs figure on page 2 of your Loan Estimate. It is the amount the refinance has to earn back.

Discount points are part of closing costs, so include them in that figure. To test whether paying points is worth it, use the Mortgage Points Calculator.