Mortgage Refinance: When Does It Actually Break Even?

Refinancing a mortgage to a lower interest rate is a popular way to save money. However, refinancing is not free. It requires taking out a new loan, which means paying closing costs (appraisal, title insurance, loan origination fees, etc.) that can total thousands of dollars. To evaluate if refinancing is a smart move, you must compute your break-even point.

The Break-Even Formula

Your break-even point is the number of months it will take for your monthly payment savings to cover the total closing costs of the refinance. The formula is simple:

For example, if your closing costs are $6,000 and your new mortgage rate saves you $150 per month, your break-even point is 40 months (about 3.3 years). If you plan to sell the home or move before 40 months, refinancing will result in a net loss.

Refinance with Extra Payments

If you refinance to a lower interest rate, you can maximize your savings by continuing to pay your old higher payment amount on the new loan. The difference goes entirely to principal prepayment, allowing you to pay off the home years faster.

Use our Mortgage Refinance Calculator to compare your current rate and calculate your exact break-even timeline.