Mortgage Refinance Break-Even Calculator

How it works

A refinance replaces your loan with a new one, usually to get a lower rate and payment, but it comes with closing costs. The question is how many months of lower payments it takes to earn those costs back. That is the break-even:

With the defaults above, refinancing a $300,000 balance to 6% over 30 years gives a payment of about $1,799, down from the current $2,200, a saving of roughly $401 a month. Dividing $5,000 of closing costs by that saving gives a break-even of about 12.5 months. Keep the new loan past that and the monthly savings are yours to keep.

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A worked example: refinancing a $300,000 balance

Suppose you owe $300,000 and your current principal and interest payment is $2,200 a month. A refinance at 6% over a fresh 30 years would drop that payment to $1,799, but it costs $5,000 in closing fees to get there.

The lower payment saves you $401 every month. Divide the $5,000 in closing costs by that monthly saving and you recover the upfront cost in about 12.5 months. Everything after that point is money in your pocket.

So the real question is whether you plan to stay in the home past a year or so. If you do, the refinance pays for itself and keeps saving. Enter your own balance, payment, and closing costs to find your break-even month.

Beyond the break-even

• Mind the term reset. Refinancing a loan you are years into back to 30 years can raise lifetime interest even as the payment falls. Compare interest, not just the monthly number.
• Do not roll costs in blindly. Financing the closing costs into the new loan hides them but you still pay interest on them. The break-even here assumes you pay them at closing.
• Match the plan to your stay. If you might move before break-even, the refinance loses money. The longer you will keep the loan, the more a refinance pays off.

When refinancing is worth a look

Not every rate drop justifies a refinance, because closing costs have to be earned back before you see a cent of benefit. The old rule of thumb was to refinance only when you could cut the rate by a point or more, but the honest test is simpler: does the monthly saving repay the costs fast enough for the time you will keep the loan? This calculator answers exactly that.

• Size of the rate drop. A bigger gap between your current and new rate means a larger monthly saving and a quicker break-even.
• How long you will stay. The saving only counts while you hold the loan, so a short expected tenure raises the bar a refinance must clear.
• The costs involved. Higher closing costs push the break-even further out, so a modest rate drop with low costs can beat a bigger drop with heavy fees.
• The term reset. A lower payment that restarts a 30-year clock can still raise lifetime interest, so weigh the payoff date alongside the monthly saving.

Rate-and-term versus cash-out

Refinances come in two broad flavors, and they serve different goals. A rate-and-term refinance swaps your loan for a new one with a better rate or a different length, aiming purely to lower the payment or shorten the payoff. A cash-out refinance replaces it with a larger loan and hands you the difference in cash, so being clear on which one you want keeps the comparison honest.

• Rate-and-term. The classic move to cut your rate or change the term, with the balance staying roughly the same as what you owe now.
• Cash-out. Useful for funding a renovation or consolidating debt, but it raises your balance and usually your payment, and often carries a slightly higher rate.
• Know which you are doing. This break-even tool assumes a rate-and-term refinance; a cash-out changes the math because the loan itself grows.
• Equity is not free. Cash pulled out is borrowed money you pay interest on for years, so treat a cash-out as new debt, not found money.

No-cost refinances and the catch

Lenders often advertise a no-cost refinance, and it can be genuinely useful, but the costs do not actually vanish. In a no-cost deal the lender covers the closing costs in exchange for a slightly higher rate, or folds the costs into the loan balance. Either way you pay, just spread out instead of up front, so it is worth asking exactly how the costs are being covered.

• Higher rate instead. Accepting a rate a touch above the best available lets the lender pay your costs, which can be smart if you might move soon.
• Rolled into the balance. Financing the costs avoids cash at closing but means paying interest on them for the life of the loan.
• Break-even still applies. A no-cost refinance has a break-even too, hidden in the higher rate, so compare the true lifetime cost, not just the cash needed today.