Refinance Break-Even
when refinancing actually saves you money.

The Simple Break-Even

The headline formula every loan officer quotes:

Break-Even Months = Closing Costs ÷ Monthly Payment Savings

If closing costs are $5,400 and the new payment is $180/month lower, the break-even is 30 months. Stay past month 30 and the refi is in the black. Sell or refi again before month 30 and you've lost money on the deal.

This number is right as far as it goes. The problem is what it leaves out.

What the Simple Break-Even Misses

Three real costs don't show up in the headline number:

1. The reset amortization tax. A 30-year refinance starts a new 30-year clock. If you're 7 years into a 30-year loan, you've been paying mostly interest for 7 years; the new loan dumps you back into year 1 of mostly-interest payments. The "savings" includes paying less principal each month.
2. Rolled-in closing costs. If the lender lets you finance closing costs into the new loan ("no-cost refi"), the savings are smaller because you're paying interest on those costs for 30 years.
3. Lost opportunity on prepayments. Extra payments you would have made on the old loan would have hit a higher principal balance. On the new loan, the same extra payment moves you less.

The Honest Break-Even

A more truthful version of the formula compares total interest paid over the period you'll actually own the home, not just monthly payment delta. To do it properly:

1. Estimate how long you'll keep the loan (years until sale or next refi).
2. Compute total payments × that horizon for both loans.
3. Subtract remaining balance at the end of the horizon for each loan.
4. Add closing costs to the new loan side.

The loan with the lower (payments − ending balance + costs) wins. The mortgage calculator outputs a remaining balance line that lets you do this in a few minutes.

Worked Example

Existing loan: $340,000 balance, 6.875%, 23 years remaining (originally 30, 7 years in). Monthly P&I: $2,478.

Proposed refinance: $345,400 (closing costs rolled in), 5.875%, 30 years. Monthly P&I: $2,043.

• Monthly savings: $435
• Closing costs: $5,400
• Simple break-even: 12 months

That looks great. But run the 7-year horizon (typical move):

• Old loan total payments over 7 years: $208,152. Remaining balance after 7 years: $267,800. Interest cost: $135,952.
• New loan total payments: $171,612. Remaining balance: $311,200. Interest cost: $137,412.

The refi saves $36,540 in monthly outflow but adds $43,400 to the ending balance. The honest break-even, accounting for the slower principal paydown, is closer to 26 months, not 12 — and only after that do you actually come out ahead. Still a winner if you're staying 5+ years; closer to a wash for 3–4 years.

Rules of Thumb That Actually Work

• Rate drop of 0.75% or more usually clears the simple break-even within 24 months on a typical loan.
• If you'll move within 3 years, refi math almost never works — closing costs eat the savings.
• Recast before refinance. If you have a lump sum, ask your servicer about a recast (re-amortization at the same rate) for $250–$500 instead of a $5,000 refi.
• Match terms. If you're 7 years in, refi to a 23-year loan, not a fresh 30. Most lenders allow custom terms; the rate is the same and you avoid the reset tax.

Cash-Out vs. Rate-and-Term

A rate-and-term refinance only changes the rate or the term. A cash-out refinance increases the loan balance to give you cash at closing. Cash-out rates run 0.25–0.50% higher than rate-and-term, and the break-even math changes — you're not just trading dollars, you're borrowing more. The right comparison for cash-out is against the next-best alternative (HELOC, personal loan, or just paying for the thing in cash).

When to Skip the Refi

• You're within 7 years of paying off the loan. Closing costs almost never pencil at that point.
• You plan to sell within 24 months.
• The rate drop is less than 0.5% and your loan balance is under $200,000.
• The lender is quoting "no-cost" but the rate is 0.375% higher than market — you're paying for the costs through the rate.

Sources

CFPB Loan Estimate and Closing Disclosure rules (Regulation Z); Freddie Mac Primary Mortgage Market Survey; Fannie Mae Refinance Application Frequency data.