Refinancing can lower your rate and monthly payment, but it costs money up front — typically 2% to 5% of the loan in closing costs. The break-even point is how long you must keep the new loan before those monthly savings repay what you spent to get it. If you will move or sell before then, refinancing loses money.
How this calculator works
The calculator works out your current principal-and-interest payment on the remaining balance and remaining term, and the payment on a new loan for the same balance at the new rate and term.
Monthly savings are the difference. Dividing closing costs by monthly savings gives the number of months to break even.
It also compares total remaining payments. Resetting to a new 30-year term can lower your payment yet increase lifetime interest, so the calculator shows both views.
The formula
Break-even months = Closing costs ÷ (M_current − M_new)- M_current
- current monthly P&I payment
- M_new
- new monthly P&I payment
- Closing costs
- fees, points and other refinance costs
Worked example
You owe $280,000 at 7.5% with 27 years left, so your payment is about $2,009. A lender offers 6.25% on a new 30-year loan with $6,000 in closing costs. The new payment would be about $1,724.
Monthly savings are $2,009 − $1,724 = $285. Dividing $6,000 by $285 gives about 21 months. If you stay in the home for more than two years, the refinance pays for itself in monthly cash flow.
However, the new loan runs three years longer than your current one. Check the lifetime result: choosing a shorter new term, or continuing to pay your old amount, can capture the lower rate without stretching out the debt.
Tips
- Get Loan Estimates from at least three lenders; closing costs vary widely.
- Paying points lowers your rate but raises closing costs and pushes the break-even point out.
- Rolling closing costs into the loan does not avoid them — you pay interest on them instead.
Frequently asked questions
What is a good break-even point for a refinance?
There is no fixed rule, but many homeowners look for a break-even point under 24 to 36 months. What matters is that you expect to keep the loan comfortably longer than the break-even period.
How much lower should my rate be to refinance?
The old rule of thumb was 1 percentage point, but the real answer depends on your balance and closing costs. A larger loan can justify a smaller rate drop. Use the break-even months rather than the rate gap alone.
Does refinancing restart my mortgage?
Yes. A refinance replaces your loan with a new one and a new term. Choosing a term equal to or shorter than your remaining years avoids extending your debt.
Are refinance closing costs tax deductible?
Most closing costs are not deductible. Points paid on a refinance are generally deducted over the life of the loan if you itemize. Check IRS Publication 936 or a tax professional.