Money guide · Mortgages and home-buying costs
Mortgage refinance break-even: is a lower rate enough?
Calculate a simple refinance break-even and compare remaining terms, closing costs, loan balances, and monthly savings.
How it works
A refinance can change the rate, remaining term, loan balance, and monthly payment. Restarting a long term can reduce payments while extending interest charges. Costs financed into the loan still have an economic cost even if little cash is due upfront. Taxes and homeowners insurance can remain separate from the change in principal and interest.
A worked example
Suppose refinancing costs $4,800 and reduces the monthly principal-and-interest payment by $160. Simple break-even is 30 months. Keeping the new loan only 18 months produces $2,880 of payment savings in this model, below the upfront cost. This quick calculation excludes differences in remaining principal, tax effects, and the opportunity cost of paying fees.
What to compare
Compare payments and loan balances at the date you expect to sell or refinance again. Request options with similar remaining terms as well as the advertised new term. Separate ordinary recurring escrow expenses from transaction costs, while still accounting for cash due. Include points, lender credits, and any added cash-out amount consistently.
A common mistake to avoid
Do not assume you can refinance again whenever needed. Eligibility and market rates can change. A lower payment caused mainly by extending repayment answers a cash-flow question but may not reduce total cost. Evaluate the budget benefit and the long-term debt separately, using actual Loan Estimates.
Are financed closing costs free?
No. They increase the amount owed and may accrue interest. Include them even if you pay little at closing.
Sources and further reading
Connect this to inflation
Inflation changes the spending power of money over time. Read the related inflation explainer, or compare dollars across years using your own assumptions.