Refinance break-even point: simple and full

#The simple formula

Break-even months = total refinance costs ÷ monthly saving.

Both halves need care:

• Costs are what the refinance itself costs you: the loan costs on your Loan Estimate (origination charges including any points, plus the services in sections B and C) and the taxes and government fees in section E. Each point is 1% of the loan. Subtract any lender credit. Leave out prepaid interest, homeowners insurance and the new escrow deposit — you would pay those anyway, and the old escrow balance is usually refunded.
• Saving is the drop in principal and interest. Taxes and insurance don’t change when you refinance, so ignore them — but if the new loan ends PMI or FHA mortgage insurance, add that too.

If your payment goes up — because you chose a shorter term — the simple formula has nothing to divide by, and only the fuller test below can tell you when you come out ahead.

#Why the simple number can mislead

The simple formula only looks at the payment. It ignores how fast each loan is paid down, which is where two common traps hide:

• A longer term. Moving 25 remaining years into a new 30-year loan lowers the payment partly by spreading the debt over more years. The saving looks bigger than it is.
• Rolled-in costs. Adding costs to the loan means no cash today, but a bigger balance and a smaller saving. It doesn’t make the break-even disappear.

The full break-even compares where you stand on each path at every month: payments made plus balance still owed, plus any costs paid in cash. It is the method our break-even calculator charts year by year. It can come out earlier than the simple answer too — when the new term is no longer than the old one, a lower rate pays the balance down faster on top of cutting the payment.

#Example 1: a smaller balance, same term

Keeping the same term, the full break-even arrives before the simple one, because the lower rate also shrinks the balance faster. Stretch to 30 years and the payment saving rises to $159, so the simple number looks better — but the full break-even comes later and you are less far ahead after five years, because much of that “saving” is debt pushed into the future. On a small balance the dollars are small either way: some costs, such as the appraisal and recording fees, don’t shrink with the loan, so they weigh more on a modest balance.

#Example 2: paying costs in cash vs rolling them in

Rolling the costs in doesn’t make the refinance free: it trims the saving by $45 a month and pushes the full break-even back by 1 year. Either way, selling after two years would leave you behind. A third option — taking a higher rate in exchange for a lender credit — is covered in our no-closing-cost refinance guide.

#How long will you keep the loan?

A break-even point only means something next to the number of years you expect to keep this mortgage — and that is often shorter than the years you expect to live in the house. The loan ends early if you:

• Sell or move for work, family or a bigger home.
• Refinance again because rates fall further, or to take cash out later.
• Pay it off early with extra payments or a windfall.

The CFPB suggests testing the shortest, longest and most likely time you might keep a loan when weighing points and credits; the same habit works here. If the full break-even falls well inside your shortest likely stay, the refinance is low-risk. If it lands near or beyond it, the savings are a bet on staying put. For reference, the law requires a VA streamline refinance to recoup its costs within 36 months — a useful yardstick for any refinance. See also when not to refinance and refinance closing costs.