Refinancing your mortgage can save you money by lowering your monthly payment or reducing the total interest you pay over time. But refinancing comes with costs—such as closing fees, appraisal charges, and lender fees. To know if refinancing makes sense, you need to calculate the break-even point: the moment when your monthly savings outweigh your upfront costs. For more strategies and mortgage calculations, explore our Step-by-Step Mortgage Guide
This guide explains how to perform a break-even analysis for refinancing step by step.
1. What Is the Break-Even Point?
The break-even point is the number of months it will take for your monthly savings from refinancing to equal the upfront costs of the new loan.
Formula:
Break-Even (Months) = Closing Costs ÷ Monthly Savings
If you plan to stay in your home longer than the break-even period, refinancing is usually worth it.
2. Step-by-Step Example
Let’s compare two scenarios for a $250,000 mortgage.
Current Loan
Balance: $250,000
Interest Rate: 6.5%
Monthly Payment (P+I): ≈ $1,580
Refinance Offer
Balance: $250,000
Interest Rate: 5.5%
Monthly Payment (P+I): ≈ $1,420
Monthly Savings: $160
Closing Costs: $4,800
Break-Even Calculation
3. Other Factors to Consider
Loan Term Reset – If you refinance into another 30-year loan, you may extend your payoff schedule, even with lower payments.
Total Interest Paid – A lower rate saves interest, but stretching payments over a longer term may add back costs.
Prepayment Penalties – Some mortgages charge fees for paying off early.
Future Plans – If you expect to sell or move soon, refinancing may not make sense.
4. Advanced Break-Even Considerations
Cash-Out Refinancing – If you’re pulling equity, factor in how those funds will be used (debt payoff, renovations, investing).
Shorter-Term Refinances – Moving from 30 years to 15 years may increase monthly payments but save huge interest.
Rate vs. Fees Trade-Off – Sometimes lenders offer lower closing costs but slightly higher rates. Compare both using break-even math.
5. Quick Checklist for Homeowners
When running your break-even analysis, ask:
What are my total closing costs?
How much will my monthly savings be?
How long will I stay in this home?
Am I comfortable resetting my loan term?
Do I have better uses for the money I’d spend on closing costs?
Conclusion
A refinancing decision should never be based on interest rates alone. The break-even analysis gives you a clear financial checkpoint: if you’ll keep the loan beyond that period, refinancing can save you thousands. If not, it may cost you more than it saves.