Refinance break-even: how to tell if a refinance will actually save you money
The short answer
Your refinance break-even point is total closing costs divided by monthly savings, which gives the number of months until the refinance pays for itself. For example, $6,000 in costs with $203 a month in savings breaks even in about 30 months. If you expect to keep the new loan longer than that, the refinance usually makes financial sense.
The basic formula
Break-even (months) = total refinance costs / monthly principal-and-interest savings
Worked example
- Current loan: $400,000 balance at 7.50%, payment about $2,797
- New loan: $400,000 at 6.75%, payment about $2,594
- Monthly savings: about $203
- Closing costs: $6,000
- Break-even: $6,000 / $203 is about 30 months
Adjust for the term reset
If you are 5 years into a 30-year loan and refinance into a new 30-year loan, part of your payment drop comes from stretching the loan back out. To compare fairly, ask for a quote on a shorter term, such as 25 or 20 years, or compare total interest remaining on each option.
Do not count escrow
Use only principal and interest when calculating savings. Taxes and insurance do not change because you refinanced. And the escrow deposit you fund at closing is usually offset by a refund of your old escrow balance a few weeks later.
Other factors
- Mortgage insurance: dropping PMI or FHA premiums adds to your savings.
- Rolled-in costs: adding costs to the balance raises your payment slightly and lowers your savings.
- Your plans: the break-even point only helps if you will stay beyond it.
Common questions
What is a good break-even period for a refinance?
Many homeowners look for 24 to 36 months or less, but anything shorter than how long you will keep the loan can work.
Is a no-closing-cost refinance a good deal?
It can be if you might move or refinance again soon. You pay through a higher rate instead of upfront.