Two ways to measure break-even
- Simple break-even
- Closing costs ÷ monthly payment savings. It is the number most refinance calculators show. In the example: $6,000.00 ÷ $247.14 = 24.3 months.
- True break-even
- The first month in which refinancing has cost less in total, counting the payments you have made, the balance you would still owe if you sold or paid off then, and any closing costs you paid in cash. In the example it is from month 27.
The two can disagree because a new loan pays down its balance at a different speed. A lower rate sends more of each payment to principal, which can make the true break-even earlier; a longer new term or financed closing costs leave a larger balance, which can make it later or mean it never arrives.
How the comparison is calculated
- The current loan's payment is the fixed-rate payment on your balance over the time left:
P × r × (1 + r)n ÷ ((1 + r)n − 1), where r is the annual rate ÷ 12 and n is the number of months. The same formula powers our loan payment calculator. - The new loan uses the same formula on your balance (plus closing costs, if you add them to the loan) over the new term.
- Both loans are amortized month by month. For every month, each option's cost is payments made so far + balance still owed + closing costs paid in cash.
- Refinancing is ahead in any month where its cost is lower. Lifetime savings compare both loans run to payoff.
Amounts are calculated at full precision and rounded to cents only for display.
Lower rate, same payoff date
Refinancing $280,000.00 from 7% to 6% while keeping the same 27 years lowers the payment by $178.72 a month. It comes out ahead from month 26 and saves $51,906.19 over the life of the loan, because the lower rate also pays the balance down faster.
When a lower payment still costs more
Resetting to a new 30-year term spreads the balance over more payments, so the payment drops even if the rate barely changes, but you pay interest for longer. For example, refinancing $300,000.00 with 25 years left from 6.5% to 6% over 30 years, with $8,000.00 of closing costs added to the loan, cuts the payment by $179.01. The simple break-even says 44.7 months, but counting the larger balance, the refinance is never ahead within the loan terms: after 3 years you would be $5,372.03 worse off, and $57,095.18 worse off over both full terms.
Refinancing to a shorter term
Moving $250,000.00 from 6.75% with 20 years left to 5.25% for 15 years raises the payment by $108.78, so the simple break-even never arrives. Yet the refinance is ahead from month 16, because the balance falls much faster, and saves $89,473.43 over the life of the loan.
Paying closing costs in cash vs. adding them to the loan
Adding closing costs to the loan avoids paying them at closing but increases the balance you pay interest on. In the example, paying $6,000.00 in cash gives a true break-even from month 27 and lifetime savings of $13,638.78; adding it to the loan gives a new payment of $1,714.71, a true break-even from month 31 and lifetime savings of $6,688.49. Your Loan Estimate lists the expected closing costs for a refinance, and your Closing Disclosure shows the final amounts (explainers from the Consumer Financial Protection Bureau).
What this calculator does not include
- Property taxes, homeowners insurance, mortgage insurance (PMI) and escrow. These usually continue either way, but can change with a new loan.
- Discount points, lender credits, cash-out refinancing and prepayment penalties.
- Tax effects, investment returns on cash you keep, and the costs of selling a home.
- Rates stay fixed for both loans, with monthly payments and interest at the annual rate ÷ 12. Adjustable-rate loans are not modeled.
- No rates are assumed for any lender. Enter the rate and costs from your own quote. Results are estimates, not a loan offer or financial advice.
Methodology and testing
Both loans use the same tested amortization engine as every loan calculator on this site. Automated tests check the planned-stay savings, true break-even month and lifetime savings against an independent month-by-month simulation, including term resets, financed closing costs and shorter terms. How we build and test calculators.
Sources
- Loan Estimate explainer, Consumer Financial Protection Bureau. The Loan Estimate lists a mortgage’s expected closing costs.
- Closing Disclosure explainer, Consumer Financial Protection Bureau. The Closing Disclosure shows the final loan terms and closing costs.
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