Refinance Break-Even Calculator
Refinancing is not free, so a lower payment is only a saving once it has repaid what the new loan cost to arrange. This gives you that break-even month.
Break-even
20months
- New payment
- $1,589.81
- Monthly saving
- $306.39
- Closing costs
- $6,000.00
- Break-even
- 1 year 8 months
- Saved in 5 years
- $12,383.45
- Staying past 1 year 8 months makes the refinance pay. Moving before then loses money on it.
- A lower payment on a fresh 30-year term is not the same as paying less. Restarting the clock can raise the lifetime interest even as the monthly figure falls.
- Compare the total remaining interest on both loans, not only the payment.
About the refinance calculator
The arithmetic is simple and the decision is not. Divide what the refinance costs by what it saves each month, and you have the number of months before you are ahead. On a $280,000 balance, dropping from a $1,896 payment to $1,590 saves $306 a month; with $6,000 of closing costs that is twenty months to break even.
The rule that follows is straightforward: if you are confident of staying past the break-even month, the refinance pays. If you might move or refinance again before then, it does not, however much better the rate looks.
There is a second effect this deliberately does not fold in, because folding it in would hide it. Refinancing usually restarts the clock. Swapping twenty-four years remaining for a fresh thirty-year term lowers the payment partly through the better rate and partly by stretching the debt over six more years — and the second part is not a saving at all. If you want the honest comparison, set the term here to what is left on your current loan rather than to thirty.
Closing costs are also easy to underestimate. Origination, appraisal, title, recording and any discount points all count, and costs rolled into the balance rather than paid up front are still costs — you are simply borrowing them at the new rate.
What it works out
- The new monthly payment at the new rate
- What you save each month
- The month you break even on the costs
- What you are ahead by after five years
The formula
Break-even months = Closing costs ÷ (Current payment − New payment)
The new payment comes from the ordinary amortization formula at the new rate and term. The rest is a division.
$280,000 at 5.5% over thirty years is $1,589.81 a month against a current $1,896.20, so the saving is $306.39. Six thousand pounds of costs divided by that is 19.6 months, which rounds to twenty — the first month you are genuinely ahead.
What this does not capture is the term reset, and it is the biggest trap in refinancing. If your current loan has twenty-four years left and you replace it with a fresh thirty, some of that $306 saving is the better rate and some is simply spreading the debt over six more years. The second part costs you more in total, not less.
The way to see through it is to enter your remaining term rather than a new thirty-year one. The payment will be higher and the saving smaller, and that smaller figure is the real one.
- Closing costs
- Origination, appraisal, title, recording and any points. Costs rolled into the loan still count.
- Current payment
- What you pay now, principal and interest only.
- New payment
- What the balance costs at the new rate and term.
A worked example
A $280,000 balance, currently $1,896.20 a month, refinanced to 5.5% over thirty years with $6,000 of closing costs.
That works out to 20 months.
- New payment
- $1,589.81
- Monthly saving
- $306.39
- Closing costs
- $6,000.00
- Break-even
- 1 year 8 months
- Saved in 5 years
- $12,383.45
Questions
When is refinancing worth it?
When you will still hold the loan past the break-even month. On a $280,000 balance saving $306 a month against $6,000 of costs, that is twenty months. Staying five years leaves you about $12,400 ahead; moving in a year leaves you worse off.
How much does a refinance cost?
Commonly two to five per cent of the loan, covering origination, appraisal, title, recording and any discount points. Ask for the full itemised figure rather than a headline rate — the rate is only half of the comparison.
What is the rule about needing a 1% lower rate?
A rule of thumb that is often wrong in both directions. What matters is the monthly saving against the costs and how long you are staying. On a large balance half a point can pay back quickly; on a small one a full point may never.
Does restarting the term matter?
It is the most commonly missed part of the decision. Replacing twenty-four remaining years with a fresh thirty lowers the payment partly by improving the rate and partly by stretching the debt, and the stretching is not a saving. Enter your remaining term here to see the honest figure.
Should I roll the closing costs into the loan?
It avoids finding the cash, but it is not free — you are borrowing the costs at the new rate for the whole term. The break-even calculation is the same either way; only where the money comes from changes.
What is a no-cost refinance?
One where the lender covers the fees in exchange for a higher rate than you would otherwise get. It can be the right choice if you expect to move soon, since there is nothing to break even on, and it is the wrong one if you are staying.
Are discount points worth buying?
They have their own break-even, calculated the same way: the cost of the points divided by what they save each month. The longer you hold the loan the better they look, and they are usually poor value if you plan to move.
Does refinancing hurt my credit?
A little and briefly. The application is a hard search and the new loan is a new account with no history, both of which nudge a score down for a few months. Neither is normally a reason to skip a refinance that pays back.