Refinancing: find your break-even month
A lower rate saves money only after it has paid back the cost of getting it. Here is how to find that month, and a common shortcut that can mislead.
Reviewed by Victor Yuki Matusita on . First published .
Refinancing replaces your mortgage with a new loan, usually at a lower rate, and that new loan comes with closing costs: appraisal, title, lender fees. The break-even month is when what you save has paid those costs back. Before it, refinancing has cost you money; after it, it starts to save.
This guide works through one example with the engine of the calculator below: $250,000 still owed at 7.25%, with 25 years left, refinanced into a new loan of 30 years at an example rate of 6%, with $6,000 of closing costs paid at closing.
Find the break-even of your loan
The calculator starts from the example of this guide. Every number in the text below comes from the same engine.
New monthly payment
$1,498.88/mo
You would pay $308.14 less a month. Counting the $6,000 of closing costs against the interest you save, the new loan breaks even in month 24, after 2 years.
- New loan $250,000 · 46%
- Interest $289,593 · 54%
Months left and closing costs
- Monthly payment
- $1,807.02
- Interest
- $292,104
- Total cost
- $542,104
- Paid off in
- 25 years
- Monthly payment
- $1,498.88
- Interest
- $289,593
- Total cost
- $545,593
- Paid off in
- 30 years
B costs $308 less a month and $3,490 more in all, closing costs included.
Open the refinance calculator on its own page
Schedule of the new loan
The shortcut: closing costs divided by monthly savings
The current payment is $1,807.02; the new one would be $1,498.88, so the payment drops by $308.14 a month. The usual rule of thumb divides the closing costs by that drop: $6,000 ÷ $308.14 gives month 20. The Federal Reserve guide to refinancing uses this kind of division to find how long it takes to recover the costs.
The shortcut is quick, and it works well when the new loan has the same term as what is left on the old one. When the term changes, it can mislead, because part of a lower payment comes from spreading the same debt over more years, not from paying less interest.
Counting interest instead of payments
A stricter test asks when the interest you avoid has covered the closing costs. Each month, add up the interest paid so far on the new loan, plus the closing costs, and compare it with the interest the current loan would have charged by then. In the example that happens in month 24, later than the shortcut says.
Over the whole life of the loans the picture changes again. The new loan charges $289,593 of interest against $292,104 for the current one, a saving of only $2,510, because it runs five years longer. Counting the closing costs, the new loan costs $3,490 more in all, even though the payment is lower every month.
Keeping the same term
If the new loan instead lasted 25 years, the same as what is left, the payment would be $1,610.75, a drop of only $196.27 a month. The shortcut would now say month 31. Counting interest, the break-even is month 24, and over the life of the loan the interest falls by $58,876.
So the shortcut can err in both directions: it looked too good for the longer loan and too gloomy for the same term. The interest test gives the same answer whichever way the payment moves.
Paying the costs or adding them to the loan
Many lenders let you add the closing costs to the new balance, or offer a no-closing-cost loan with a higher rate. The CFPB points out that the costs do not disappear either way. In the example, adding the $6,000 to the loan raises the payment to $1,534.85 and moves the interest break-even to month 27, because you now pay interest on the costs too.
Whatever the method, compare the break-even with how long you expect to keep the home. If you may sell before it, refinancing is likely to cost more than it saves.
Break-even by closing costs and new rate
The same $250,000 balance at 7.25% with 25 years left, refinanced into a 30-year loan. The shortcut and the interest test side by side.
| Closing costs | New rate | Monthly savings | Shortcut: costs ÷ savings | Interest break-even |
|---|---|---|---|---|
| $3,000 | 5.5% | $387.55 | month 8 | month 9 |
| $3,000 | 6% | $308.14 | month 10 | month 12 |
| $3,000 | 6.5% | $226.85 | month 14 | month 20 |
| $6,000 | 5.5% | $387.55 | month 16 | month 17 |
| $6,000 | 6% | $308.14 | month 20 | month 24 |
| $6,000 | 6.5% | $226.85 | month 27 | month 42 |
| $9,000 | 5.5% | $387.55 | month 24 | month 26 |
| $9,000 | 6% | $308.14 | month 30 | month 37 |
| $9,000 | 6.5% | $226.85 | month 40 | month 68 |
Worked out with the engine of this site on , month by month in cents. The rates are examples.
The two methods
Shortcut: break-even month = closing costs ÷ (current payment − new payment), rounded up.
Interest test: the first month m in which closing costs + interest paid on the new loan by month m ≤ interest the current loan would have charged by month m. Each payment is M = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), and each month the interest is the balance times r, rounded to the cent.
Assumptions
- Both loans are fixed-rate with equal monthly payments; the current payment is worked out from the balance, rate and months left.
- No prepayment penalty, tax effect or change in escrow.
- The rates and costs are examples chosen for this guide.
Worked example
Current loan: $250,000 at 7.25%, 25 years left, $1,807.02 a month. New loan: 30 years at 6%, $1,498.88 a month, $6,000 of closing costs. Shortcut: month 20. Interest test: month 24.
Sources
Educational guide
This guide is educational, not financial advice and not a loan offer. A lender decides whether you qualify and at what rate and cost.