Refinance break-even
Break-even is the point where your monthly savings from a refinance have "paid back" the closing costs. It's a useful sanity check, but it depends on your rate, term, costs, taxes, and how long you'll keep the mortgage.
A simple break-even formula
A common first-pass estimate is:
- Monthly savings = old monthly payment - new monthly payment (keep assumptions consistent).
- Break-even months = closing costs / monthly savings.
If you plan to move or refinance again before break-even, refinancing may not make sense. If you'll keep the loan longer, a refinance can be beneficial even if break-even takes a while.
Worked example (computed)
Example: $300,000 mortgage at 6.50% vs refinance at 5.75% with $6,000 in closing costs, both 30-year terms.
| Scenario | Rate | Term | Monthly P&I | Total interest |
|---|---|---|---|---|
| Current | 6.50% | 360 mo | $1,896.20 | $382,633 |
| Refi | 5.75% | 360 mo | $1,750.72 | $330,259 |
Monthly savings are about $145.49. Break-even is roughly 42 months (3y 6m).
Break-even sensitivity (costs)
Small changes in closing costs can shift break-even by months. Use this table to see how sensitive the estimate is to fees.
| Closing costs | Break-even (months) | Break-even (years) |
|---|---|---|
| $4,000 | 28 months | 2y 4m |
| $6,000 | 42 months | 3y 6m |
| $8,000 | 55 months | 4y 7m |
What can change results
- Loan term resets (30-year refi vs remaining term).
- Points vs rate trade-off (upfront cost vs lower rate).
- Rolling costs into the loan (affects balance and interest).
- Taxes and deductions (if applicable).
Refi vs extra principal
If your rate is already low, extra principal payments can be a simpler path: no closing costs, and you can stop any time. If rates dropped materially, refinancing may outperform extra payments over the same horizon.
Costs to include in break-even
- Lender fees: origination, underwriting, and processing.
- Points: paid to buy down the rate (optional).
- Third-party costs: appraisal, title, recording, and escrow fees.
- Prepaid items: interest, taxes, and insurance that affect cash-to-close.
Some of these costs are unavoidable, while others are optional. A lower rate can be attractive, but if you pay high points you need a long enough horizon to recoup them.
Break-even vs total cost
Break-even focuses on how long it takes to recoup closing costs through monthly savings. But total cost can tell a different story if you reset to a new 30-year term or pay large points upfront.
A refinance with a lower payment might still cost more in total interest if it extends the term significantly. Always compare the total interest over your expected time horizon, not just the monthly payment.
Statement check
- Use the note rate on your statement, not a blended APR.
- Confirm the remaining term in months (not the original term).
- Match the closing cost list to the Loan Estimate fee breakdown.
How to compare with these tools
- Compute your current monthly payment and baseline amortization.
- Compute the refinance monthly payment using the new rate/term/fees assumptions.
- Compare total interest and the time horizon you actually expect to hold the loan.
Questions? Email admin@practicalfinancetools.com.
Checklist: before you decide
- Confirm remaining term: compare against the term you actually have left.
- Itemize closing costs: lender fees, points, and third-party costs.
- Decide cash vs roll-in: rolling costs raises the balance and interest.
- Estimate time horizon: if you plan to move within a few years, break-even matters more.
- Compare total interest: not just the monthly payment.
FAQ
Is break-even the only thing that matters?
No. Break-even is a useful checkpoint, but your total interest, cash-to-close, and expected time horizon often matter more.
Should I reset to 30 years to lower the payment?
It can lower the payment, but it may increase total interest. Consider a shorter term or make extra principal payments if you want to avoid extending the payoff timeline.
Are points worth it?
Points can reduce the rate but increase upfront cost. Use break-even math to see if the monthly savings justify the cost given how long you plan to keep the loan.
References
- CFPB: Mortgages resources
Educational use only. Not financial advice.
Last updated: 2026-02-08