- Break-even is closing costs divided by the monthly saving — if you might move before it, the rate does not matter.
- A lower payment can come from a lower rate or a longer term, and only the first is a saving.
- Refinancing into the same number of years you had left is what turns a rate improvement into an actual interest saving.
- A no-cost refinance is not free — the costs are usually in the rate, so compare the payment, not the fee sheet.
How refinancing break-even works
Refinancing replaces the mortgage you have with a new one, usually at a lower rate and usually with a fresh 30-year or 15-year term. It costs money on day one — origination, appraisal, title and recording — and it pays that money back slowly, through a smaller payment.
Break-even is the month those two things meet: the point at which the accumulated monthly saving equals the closing costs. Before it, refinancing has cost you money. After it, it is ahead. If you expect to sell or move before break-even, the arithmetic says no regardless of how good the new rate looks.
The second number on this page is the one that gets left out. A payment can fall for two completely different reasons — a lower rate, or a longer term — and only one of them is a saving. The total-interest comparison separates them.
The math
The current payment is re-solved from your balance and remaining term, so it reflects the loan as it stands rather than the payment you were quoted at closing. Interest still to come on the current loan is that payment times the remaining months, minus the balance.
The new loan is the same balance amortized at the new rate over the new term. Its total interest is the new payment times its months, minus the balance. Break-even is the closing cost divided by the monthly saving, rounded up — month 13 has not yet recouped a cost that month 14 does.
The lifetime figure is the current loan’s remaining interest, minus the new loan’s total interest, minus the closing costs. It goes negative whenever the term is re-stretched far enough that a lower rate over more years costs more than a higher rate over fewer. Both numbers are shown because they genuinely disagree, and a calculator that reports only the flattering one is not a calculator.
Worked example
A $400,000 balance at 6.5% with 25 years left costs $2,701 a month and has $410,249 of interest still to come. Refinance it at 5.25% over a fresh 25 years for $4,000 in closing costs: the payment falls to $2,397, a saving of $304 a month, and the costs are recouped in 14 months. Total interest on the new loan is $319,097, so net of costs the refinance is $87,151 ahead. That one is straightforwardly good.
Now the same balance with only 15 years left, refinanced to 25 years at 5.75%. The payment falls from $3,484 to $2,516 — $968 a month — and break-even arrives in five months. It still costs $131,730 more in total, because ten extra years of interest swamp the rate improvement. Nothing in the payment comparison reveals that.
Key terms
- Break-even point
- The month the accumulated monthly saving has recouped the closing costs. Before it you are behind; after it you are ahead.
- Closing costs
- Origination, appraisal, title, recording and related fees paid to put the new loan in place. Enter your own total rather than assuming a rule of thumb.
- Cash-out refinance
- Refinancing for more than the current balance and taking the difference in cash. It is a separate borrowing decision and is not modelled here.
- Rate-and-term refinance
- Refinancing purely to change the rate, the term, or both, with no additional borrowing — the transaction this calculator models.