How refinance break-even is calculated
A refinance replaces your mortgage with a new one. You pay closing costs up front (or add them to the balance) in exchange for a lower payment. The break-even point is how many months of savings it takes to repay those costs:
Current payment = P × r₁ / (1 − (1 + r₁)^−n₁) (remaining balance and months)
New payment = L × r₂ / (1 − (1 + r₂)^−n₂) (L = balance + cash out [+ costs if rolled in])
Break-even months = closing costs ÷ (current payment − new payment)
We also compare total remaining payments on each loan. This catches the most common refinance trap: a lower payment that costs more overall because the clock restarts at 30 years.
Worked example
$280,000 left at 7.25% with 28 years remaining, refinanced into a new 30-year loan at 6.25% with $6,000 in costs paid at closing:
| Current payment | $1,949.24 |
|---|---|
| New payment | $1,724.01 |
| Monthly savings | $225.23 |
| Break-even | 2 years 3 months |
| Remaining payments, current loan | $654,944 |
| Payments on new loan + costs | $626,643 |
| Lifetime difference | saves $28,302 |
The payment falls by about $225 and the costs are recovered in 2 years 3 months. In this case the new loan also costs less over its life even though it runs two years longer than the remaining term — but that is not guaranteed: with a smaller rate cut, restarting at 30 years can cost more in total. Always check the lifetime line, and consider a shorter new term or continuing to pay your old amount.
When refinancing tends to make sense
- You expect to stay in the home well past the break-even month.
- The new loan’s lifetime cost (including closing costs) is lower, or the shorter payment is worth the extra total cost to you.
- You are removing PMI or FHA mortgage insurance, or moving from an adjustable to a fixed rate.
Your Loan Estimate lists every closing cost on page 2; the CFPB’s explainer walks through each line.
Frequently asked questions
What counts as closing costs on a refinance?
Lender fees, any discount points, appraisal, title insurance and recording fees. Prepaid interest and escrow deposits are also due at closing, although your old lender refunds the balance of your old escrow account.
Is rolling closing costs into the loan a good idea?
It avoids cash out of pocket, but you pay interest on those costs for the whole term. The calculator shows the effect: tick the box and compare the lifetime difference.
How is break-even affected by a cash-out refinance?
Cash out raises the new balance and payment, so monthly savings shrink or turn negative. Judge a cash-out refinance by the cost of the cash, not by break-even.