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How refinancing break-even works

The refinance break-even is closing costs divided by the monthly saving. Moving a $300,000 balance from 7.25 percent with 25 years left to 6.25 percent over a fresh 30 years drops the payment by $321.27, so $5,000 of costs is recovered in 15.56 months. Part of that drop is the longer term.

Closing costs earned back after

16 months

The payment goes from $2,168.42 to $1,847.15, so $321.27 a month covers the $5,000.00 it costs to arrange.

New monthly payment
$1,847.15
Saved every month
$321.27
Interest left on the loan you have
$350,526.18
Interest on the new loan, plus costs
$369,974.58

Over its life the new loan costs $19,448.40 more, closing costs included, with 25 years left becoming 30 years.

$

What is left on the loan today, not what you originally borrowed. That balance is what the new loan pays off.

%

The note rate on the loan, not its APR.

yr
%

The note rate being quoted, not the APR. An APR already has the fees folded into it, so using one here and filling in the closing costs below charges you for them twice.

yr
$

Lender fees, appraisal, title work, recording and any points bought.

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In short

  • The loan you have: $300,000 at 7.25 percent with 25 years left pays $2,168.42 a month. Running it to the end costs $650,526.18, of which $350,526.18 is interest.
  • A new 30-year loan at 6.25 percent on the same $300,000 pays $1,847.15. Total repaid is $664,974.58. Interest is $364,974.58, more than the old loan had left, because 25 years became 30.
  • The payment falls by $321.27. $5,000 of closing costs take 15.56 months to earn back. Month 16 is the first month the refinance is ahead on cash.
  • Keep the 25 years and cut only the rate to 6.25 percent. The payment is $1,979.01. Total repaid is $593,702.44. Interest is $293,702.44, which does beat the old $350,526.18.
  • Refinancing is a new loan, not a rate sticker on the old one. The term you pick is part of the cost.

A lower payment can still cost more

Refinancing replaces one loan with another. The comparison that matters is not the two payments. It is the interest still owed on the loan you have, against the interest plus closing costs on the loan that would replace it, and how long you will keep the new loan.

On $300,000 at 7.25 percent with 25 years left, the payment is $2,168.42. Running it out costs $650,526.18, of which $350,526.18 is interest.

Replace it with 6.25 percent over a fresh 30 years. The payment falls to $1,847.15, a saving of $321.27 a month. Total repaid rises to $664,974.58. Interest is $364,974.58, more than the $350,526.18 the old loan had left, and that is before $5,000 of costs. The rate went down a point. The cost of the debt went up, because 25 remaining years became 30.

The refinance break-even calculator on this page is those two payments and the months to earn the costs back. How mortgages work is the loan being replaced. Principal is what both formulas are amortising.

Break-even is a cash count, not a value count

$5,000 of closing costs over a $321.27 monthly saving is 15.56 months. Round up: month 16 is the first month the refinance is ahead on cash.

That count treats a month of saving in year two as worth the same as a month of saving today. It also ignores that the new loan pays its balance down more slowly, so the $321.27 arrives in the account rather than in equity. Leave before month 16 and the costs have not been earned back in cash. Stay for 30 years and the extra interest on the longer term is the larger bill.

Points paid on the loan you are replacing do not transfer. How mortgage points work is why: the remaining un-recovered points leave with this loan, and the new loan starts its own clock if you buy points again.

Cut the rate and keep the remaining term

Hold $300,000 and 25 years. Cut only the rate to 6.25 percent. The payment is $1,979.01. Total repaid is $593,702.44. Interest is $293,702.44, which is less than the old $350,526.18.

This is the comparison that isolates the rate. The 30-year reset mixed a rate cut with five extra years. A lower payment on a longer clock is two moves, and they can point in opposite directions.

What this page is not doing

It is not a cash-out refinance, not points, and not a credit-score screen. The four sheets are the old $2,168.42 payment, the 30-year reset at $1,847.15, the 15.56-month cash break-even on $5,000 of costs, and the same 25 years at 6.25 percent ($1,979.01). This is educational material, not financial advice.

Worked examples

The loan you already have

You owe $300,000 at 7.25 percent with 25 years left to run. What is the payment, and what does keeping it to the end cost?

  1. Find the period rate: i=0.0725/12=0.00604167i = 0.0725/12 = 0.00604167.
  2. Count the payments left: n=25×12=300n = 25 \times 12 = 300.
  3. Apply the level-payment formula: M=300000×0.006041671−(1.00604167)−300M = 300000 \times \frac{0.00604167}{1 - (1.00604167)^{-300}}, which is $2,168.42.
  4. Multiply by the 300 payments left, using the exact payment rather than the rounded one: $650,526.18.
  5. Take the balance back off to isolate the interest: $650,526.18 minus $300,000.

The payment is $2,168.42 a month. Running the loan to its last payment costs $650,526.18 in all, of which $350,526.18 is interest. That interest figure is the one a refinance has to beat, and it is the number most comparisons quietly leave out.

The new loan, at a lower rate over a fresh term

A lender offers 6.25 percent on the same $300,000 over a new 30 year term. What does that loan cost?

  1. The new period rate is i=0.0625/12=0.00520833i = 0.0625/12 = 0.00520833, and the fresh term makes n=360n = 360.
  2. M=300000×0.005208331−(1.00520833)−360M = 300000 \times \frac{0.00520833}{1 - (1.00520833)^{-360}}, which is $1,847.15 a month.
  3. Multiply by the 360 payments, using the exact payment rather than the rounded one as in the first example: $664,974.58 repaid over the life of the loan. Multiplying the displayed $1,847.15 instead lands 58 cents low, because the rounding is multiplied 360 times over.
  4. Take off the $300,000 borrowed: $364,974.58 of interest.

The payment falls to $1,847.15, and the interest rises. The new loan charges $364,974.58 where the old one had $350,526.18 left to run, and that is before the $5,000 it costs to arrange. The rate went down a full point and the cost of the debt went up, because 25 remaining years became 30.

How long the closing costs take to earn back

The refinance costs $5,000 to arrange and the payment falls from $2,168.42 to $1,847.15. How many months of that saving does it take to get the $5,000 back?

  1. Find the monthly saving, which is all the refinance produces each month: 2168.42−1847.152168.42 - 1847.15, so $321.27.
  2. Divide the cost by the saving: 5000/321.27=15.565000 / 321.27 = 15.56 months.
  3. Part of a month does not arrive, so round up. Month 16 is the first month the refinance is ahead on cash.
  4. Both payments are fixed by contract once the loan closes, so the saving is firm, but the division around it is not exact. The costs are an estimate until they are finalised at closing, the two payments are rounded to the cent before subtracting, and a month of saving in year two is treated as worth the same as a month of saving today. It is also cash only: the new loan pays its balance down more slowly, so the $321.27 arrives in your account rather than in your equity.

The $5,000 is earned back after 15.56 months, so month 16 is the point the refinance turns positive on cash. Before then the costs are larger than everything the lower payment has saved. That is a cash-flow answer rather than a verdict: on this term the same refinance still charges $364,974.58 of interest against the $350,526.18 left on the loan it replaced.

The same rate cut without the extra five years

The lender will also write the 6.25 percent loan over the 25 years actually left instead of a fresh 30. What does that version cost, and how does its break-even compare?

  1. The rate is the one from the second example and the term is the one from the first: i=0.0625/12=0.00520833i = 0.0625/12 = 0.00520833 and n=25×12=300n = 25 \times 12 = 300.
  2. M=300000×0.005208331−(1.00520833)−300M = 300000 \times \frac{0.00520833}{1 - (1.00520833)^{-300}}, which is $1,979.01 a month.
  3. Multiply by the 300 payments, again using the exact payment rather than the rounded one: $593,702.44.
  4. Take off the $300,000 borrowed: $293,702.44 of interest.
  5. The monthly saving is now $2,168.42 minus $1,979.01, which is a little over half the saving the 30 year version produced. Dividing $5,000 by it gives 26.4 months, so month 27.

The payment is $1,979.01 and the interest is $293,702.44, against $350,526.18 left on the loan being replaced. This version is cheaper on the payment and cheaper over the life of the loan at the same time, which the 30 year version at $364,974.58 is not. Its break-even is the longer one at 27 months against 16, because a smaller monthly saving takes longer to return the same $5,000. Two versions of one refinance, and the break-even month ranks them in the opposite order to the lifetime cost.

Common questions

If the payment falls, is the refinance cheaper?

Not always. On this sheet the payment falls from $2,168.42 to $1,847.15 while interest over the life of the new loan, $364,974.58, sits above the $350,526.18 the old loan had left. The extra years did that. Compare remaining interest, not the two payments.

What does the 15.56-month figure measure?

How long $321.27 a month takes to hand back $5,000 of closing costs, in cash. It does not price the slower principal paydown, and it does not discount later months. It is a cash count.

Should I reset the term to 30 years?

That is a separate choice from the rate. Keeping 25 years at 6.25 percent on this sheet pays $1,979.01 and $293,702.44 of interest. Resetting to 30 years pays $1,847.15 and $364,974.58 of interest. The break-even month does not make that choice for you.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.