Is Refinancing Worth It? How to Calculate Your Break-Even Point

What is the refinance break-even point?

The refinance break-even point is the point at which the monthly savings from a new mortgage equal the total closing costs you pay upfront. In other words, it’s how many months you need to stay in the home—and keep the new loan—before the refinance starts saving you money.

A typical rule of thumb is that refinancing becomes worthwhile if you plan to stay in your home past the break-even period. If you might move or refinance again before that point, you could end up losing money overall.

• The break-even point is calculated by dividing total closing costs by monthly savings.
• Monthly savings is the difference between your current monthly payment and your new monthly payment.
• A shorter break-even period means you start saving sooner, making the refinance more attractive.

Sources: Yahoo Finance, Chase, Refi.com

Total refinancing costs to consider

Before you can calculate a break-even point, you need to know the full cost of refinancing.

These costs can include loan origination fees, appraisal fees, title search and insurance, and other lender and third-party charges. Some lenders offer no-closing-cost refinances, but those usually come with a higher interest rate or a larger loan balance—so you may pay more in the long run.

• Loan origination fees
• Appraisal fees
• Title costs
• Other lender and third-party fees

Sources: Yahoo Finance, Chase, Mortgage Calculator, Refi.com

How to calculate monthly savings

Your monthly savings is simply the difference between your current monthly mortgage payment and the new payment you’d have with the refinanced loan. The new interest rate and the loan term will determine the new payment.

Your lender can provide a good-faith estimate of your new payment.

Sources: Yahoo Finance, Chase, Refi.com

Break-even formula and example

The break-even formula is straightforward: divide your total closing costs by your monthly savings. The result is the number of months to break even.

For example, if your total closing costs are $6,000 and your monthly savings are $231, your break-even period is about 26 months (6,000 ÷ 231 = 25.97, or roughly 2 years and 2 months). That means you’d need to stay in the home for roughly 2 years and 2 months to recoup the costs.

Other examples show the same logic. The key is to plug in your own numbers.

1. Add up all your refinance closing costs (origination fees, appraisal, title, etc.).
2. Estimate your new monthly mortgage payment and subtract it from your current payment to get monthly savings.
3. Divide your total closing costs by your monthly savings to get the break-even period in months.
4. Compare that period to how long you plan to stay in the home. If you’ll stay longer, the refinance can be worth it.

Sources: Yahoo Finance, Credible, LendingTree, Freedom Mortgage

Factors that affect the break-even timeline

Extending the loan term can lower your monthly payment and shorten the break-even period, but it also means you reset the clock and may pay more total interest over the life of the loan. Buying discount points increases your closing costs, which can lengthen the break-even period.

• Interest rate reduction—larger drops increase monthly savings and shorten the break-even time.
• Loan term—extending it can lower payments but may increase total interest.
• Closing costs—higher costs lengthen the break-even period.
• Discount points—paying points raises upfront costs and can delay break-even.

Sources: Refi.com, Freedom Mortgage, Mortgage Calculator

When refinancing may not be worth it

If you plan to move or refinance again before reaching the break-even point, you may not recover the closing costs. For example, if your break-even is 30 months but you expect to sell in 18 months, you’d likely lose money on the refinance.

A no-closing-cost refinance can make sense if you want to lower your payment without laying out cash, but you need to account for the trade-offs: the lender may charge a higher interest rate or add the fees to your loan balance, which means you could pay more over time even if you break even quickly.

In general, a break-even period of about two years or less is often considered reasonable if you plan to stay in the home longer, based on examples from several sources (13 months, 26 months, 30 months). However, there is no universal rule—you should calculate your own break-even and compare it to your expected time in the home.

Sources: Refi.com, Freedom Mortgage, Mortgage Calculator, Credible, LendingTree