Refinance Break-Even Calculator: When Does It Pay Off?

Refinancing to a lower rate can cut your mortgage payment, but closing costs come first. This refinance break-even calculator shows your monthly savings and how many months it takes to earn those costs back, so you can see whether you will keep the home long enough for a refinance to pay off.

How to use this calculator

1. Loan balance, current rate and years left. All three are on your latest mortgage statement. For years left, divide the months remaining by 12 and round.
2. New rate and term. Use the numbers on a Loan Estimate, the standard form that shows the key details of a mortgage you have applied for (CFPB). Advertised rates may assume points or a perfect credit score.
3. Closing costs. Use the total closing costs on the Loan Estimate, including any discount points, minus lender credits. Leave out prepaid items such as interest, taxes and insurance that you would pay anyway.

How this calculator works

The calculator works out the monthly principal and interest payment for your current loan over the years left, and for the new loan over the new term, using the standard amortization formula. The difference is your monthly savings. Closing costs divided by those savings, rounded up, is your break-even in months.

Payment          = Balance × r ÷ (1 − (1 + r)^(−n))
                   r = yearly rate ÷ 12, n = years × 12
Monthly savings  = Current payment − New payment
Break-even       = Closing costs ÷ Monthly savings (rounded up to whole months)

If the new payment is not lower, there is no break-even point. The CFPB describes the same rough method for discount points: divide the cost by the monthly savings (CFPB).

Worked examples

These examples are hypothetical. The tool’s default numbers are examples, not current market rates.

Example 1 (the tool’s defaults): $280,000 balance at 7.25% with 27 years left, refinanced to 6.25% for 30 years with $6,000 in closing costs.

• Current payment: about $1,971.74 a month (324 payments left).
• New payment: about $1,724.01 a month (360 payments).
• Monthly savings: $1,971.74 − $1,724.01 = $247.74 (shown as $247.73 when using the rounded payments).
• Break-even: $6,000 ÷ $247.74 = 24.2, rounded up to 25 months.

Example 2 (keep the same payoff date): everything the same, but the new term is 27 years instead of 30.

• New payment: about $1,791.11 a month.
• Monthly savings: about $180.63.
• Break-even: $6,000 ÷ $180.63 = 33.2, rounded up to 34 months.

Example 2 saves less each month, but it does not add three years of payments. Over the full term, Example 1’s new loan costs about $620,643 in payments, Example 2’s about $580,319, and keeping the current loan about $638,845 (all before closing costs).

What your result means

• Break-even months is the point where your savings have repaid the closing costs. If you expect to sell, move or refinance again before then, the refinance probably costs you money.
• Monthly savings helps your budget now, but check where it comes from. A longer new term lowers the payment even without a lower rate.
• Total cost matters most if you plan to stay. Compare total payments plus closing costs, as in the examples above.

Your full housing payment also includes taxes, insurance and possibly HOA dues. Our monthly housing cost calculator shows them together, and our mortgage escrow account guide explains the escrow part.

Rules that change the answer

• No-closing-cost loans. The CFPB explains that the costs are still paid, through a higher interest rate or by adding them to the balance (CFPB). Enter the higher rate, or add the costs to the balance and set closing costs to 0.
• Points and taxes. The IRS says points paid to refinance are generally deducted over the life of the loan, not all at once (IRS Topic 504). Any tax benefit is not included here.
• Right to cancel. For many refinances secured by your main home, you can cancel until midnight of the third business day after closing. A refinance with the same lender is exempt except for any new money you borrow (CFPB, 12 CFR 1026.23).
• Prepayment penalties. Check your current loan documents. A penalty adds to your closing costs.

Common mistakes

• Comparing an advertised rate instead of the rate on your Loan Estimate.
• Leaving discount points out of closing costs, or counting prepaid taxes and insurance as costs.
• Looking only at the monthly payment and ignoring the extra years a new 30-year loan adds.
• Forgetting that a cash-out refinance raises the balance, so the payments are not directly comparable.
• Not comparing the break-even point with how long you will really keep the loan.

Comparison: same refinance, different choices

$280,000 balance, current 7.25% with 27 years left (hypothetical).

Limits and when to get help

This tool compares principal and interest only. It doesn’t include changes to mortgage insurance, the time value of money, taxes, or a new escrow deposit at closing. It assumes fixed rates for both loans, so it does not fit adjustable-rate loans well.

Ask lenders for written Loan Estimates and question any fee you don’t understand. A HUD-approved housing counselor can help you look at your options and make a decision that fits your situation (CFPB), and a tax professional can explain how points and interest affect your return.