Refinance break-even calculator: when does refinancing pay off?
Find your refinance break-even point: monthly savings, months to recover closing costs, and interest saved over the years you keep the loan, including the cost of a new 30-year term.
The short answer
Refinance break-even point = closing costs divided by monthly savings. Refinancing a $350,000 balance with 28 years left from 7.50% to a new 30-year loan at 6.75% saves about $225 a month; with $7,000 of closing costs, you break even in about 31 months. Over 7 years you'd pay about $10,300 less in interest after costs. Refinancing makes sense only if you'll keep the loan past the break-even point.
How to calculate a refinance break-even point
Break-even months = total closing costs ÷ monthly savings. Use the closing costs from your Loan Estimate, leaving out prepaid interest and escrow deposits you'd pay anyway, and the difference in principal-and-interest payments.
Worked example: $350,000 owed at 7.50% with 28 years left is about $2,495 a month. A new 30-year loan at 6.75% is about $2,270, a $225 saving. $7,000 ÷ $225 = 31 months.
Why monthly savings can mislead
A new 30-year loan restarts the clock. Lower payments partly come from stretching the remaining balance over more years, so compare interest paid while you keep the loan, not just the payment. In the example, interest over the next 7 years falls from about $175,700 to about $158,400, a $17,300 difference, or about $10,300 after closing costs. Choosing a term close to your remaining years (or paying extra each month) avoids the reset.
When refinancing is worth it
- You'll stay in the home and keep the loan well past the break-even month.
- The new rate is low enough that savings cover costs within a few years.
- You want to drop FHA mortgage insurance or PMI, or move from an adjustable to a fixed rate.
This week's average 30-year rate is 7.32% (Freddie Mac). Read the full refinance break-even guide and should you refinance above 7%?
Frequently asked questions
How do you calculate the break-even point on a refinance?
Divide total closing costs by monthly savings. $7,000 in costs and $225 a month in savings break even in about 31 months.
What is a good break-even point for a refinance?
One you'll clearly outlast. If you expect to keep the loan for 7 years, a 2- to 3-year break-even leaves years of savings; a 6-year break-even leaves almost none.
Does a refinance restart my loan term?
Yes, if you choose a new 30-year term. That lowers the payment partly by stretching the balance, so compare interest paid over the years you keep the loan, not just the payment.
What closing costs should I include in the break-even?
Lender fees, title, appraisal and recording costs, plus any discount points. Leave out prepaid interest and escrow deposits you'd pay anyway.
Is it worth refinancing for 0.5% lower?
It can be on a large balance with low costs and a long stay. On $350,000 over 30 years, going from 7.25% to 6.75% saves about $118 a month in principal and interest.