- Break-even is the upfront cost 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 amortization, and only the first is a saving.
- Refinancing mid-term usually means a prepayment charge; refinancing at renewal usually does not.
- Keeping the same amortization on the new loan is what turns a rate improvement into an actual interest saving.
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 amortization. It costs money on day one — a prepayment charge if you break the term early, plus discharge, appraisal and legal fees — 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 upfront cost. 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 amortization — 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 amortization, so it reflects the loan as it stands rather than the payment you were quoted when you took it out. 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 amortization. Its total interest is the new payment times its months, minus the balance. Break-even is the upfront cost divided by the monthly saving, rounded up — month 13 has not yet repaid 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 upfront cost. It goes negative whenever the amortization 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 costs: the payment falls to $2,397, a saving of $304 a month, and the costs are recovered 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 repaid the upfront cost of refinancing. Before it you are behind; after it you are ahead.
- Prepayment charge
- What a lender charges to break a closed mortgage before the end of its term. The formula is contract-specific — enter your own figure rather than assuming one.
- Re-amortization
- Restarting the amortization clock on the new loan. It lowers the payment and raises total interest, and it is the single biggest hidden cost in a refinance.
- Blended rate
- An alternative some lenders offer: your existing rate and the current rate averaged over the remaining term, avoiding a prepayment charge but capturing less of the rate drop.