Refinance break-even calculator: when do the costs pay off?

What a refinance break-even calculator measures

Refinancing swaps the loan you have for a new one, usually at a lower rate, and the new loan has costs: fees, points and the rest of the closing bill. A refinance break-even calculator answers one question about that trade — how long until the saving has paid the costs back. If the loan is sold, moved or repaid before then, the refinance cost more than it saved.

The usual way to work it out is a single division: costs over the monthly saving. This page shows that figure, and next to it a second one that also counts the balance still owed. The two often disagree, and the reason is the most useful thing to understand about refinancing.

Why the shortcut can be wrong

The example loan has $300,000 left at 7% with 25 years to run, a payment of $2,120.34 a month. The new loan is 6.5% over 30 years, at $1,896.20 a month, with $6,000 of costs paid in cash. That is $224.13 a month less, and $6,000 divided by $224.13 is just under 27 months. That is the shortcut’s answer.

But part of that $224 is not a saving at all. Spreading the balance over 30 years instead of 25 makes each payment smaller partly by repaying the debt more slowly. Look at year five. By then the lower payment has kept $13,448 in your pocket; take off the $6,000 of costs and the shortcut says you are well ahead. But the new loan still owes $280,833 where the old one would have owed $273,486 — $7,347 more. Count that and refinancing is only just over $100 ahead. Counting the balance, break-even arrives at month 59, not month 27.

And it does not last. The new loan has five more years of payments than the old one had left, so the advantage peaks and then shrinks: from month 174, about 14 and a half years in, refinancing is behind again. Over the full life of both loans, the example pays $52,532 more in total — $382,633 of interest on the new loan against $336,101 left on the old one, plus the costs.

When the shortcut is too cautious

The error runs the other way too. Keep the same rate cut but take the new loan over 25 years, matching what was left. The payment falls to $2,025.62, only $94.72 less, so the shortcut says 64 months. Counting the balance, it is 49: at the lower rate, more of every payment goes to the balance, so the new loan is paid down faster as well as costing less each month. That one stays ahead, and finishes $22,415 ahead over its life.

A shorter term breaks the shortcut entirely. Over 20 years the new payment is $2,236.72, $116.38 more than now. There is no saving to divide the costs by, so the usual sum has no answer — yet counting the balance, the refinance is ahead from month 41 and finishes $93,289 ahead. The balance is falling so much faster that it outweighs the higher payment within three and a half years.

Adding the costs to the loan

If the costs are borrowed rather than paid in cash, switch that on under “More options”: the costs are added to the new balance, so there is no cash outlay, but the new loan starts at $306,000 and charges interest on the extra $6,000 for 30 years. In the example the payment becomes $1,934.13, the shortcut says 33 months, and counting the balance it never breaks even — the starting gap is the same $6,000, and the slower repayment keeps it open. Whether costs are paid in cash or borrowed, the page counts the same $6,000 against you on day one; what changes is how fast the gap closes.

What goes into the costs

Everything you pay to get the new loan: lender fees, points bought to lower the rate, appraisal, title and the other settlement charges. In the US, the Loan Estimate a lender gives you for a mortgage you have requested lists its estimated closing costs, and the Consumer Financial Protection Bureau explains the form line by line on its Loan Estimate page. The $6,000 on this page is only an example; there is no typical figure built in. To see what points do on their own, put the cost of the points in the costs box and the lower rate they buy in the rate box, and the page shows how long they take to earn back.

What the figures leave out

The page compares dollars, not their timing. Money not spent on payments is counted as cash; no return is assumed on it, and none on the costs paid up front. That is a simplification in both directions, and it matters most for the lifetime figure, which adds up payments decades apart. Property tax, insurance and escrow, mortgage insurance, prepayment penalties, and any tax effect of mortgage interest are not modelled — they depend on the loan and the country. Interest is charged monthly at the quoted annual rate divided by twelve, the same way the loan repayment calculator works, so the payments here match the ones it shows.

Related tools and guides

For why the balance falls so slowly in the early years — the effect that makes a longer term so expensive — read why most of a mortgage payment is interest. If the question is paying more each month rather than changing the loan, the mortgage overpayment calculator shows the years and interest an overpayment saves, and overpay the mortgage or invest works through the comparison with investing the same money. For the difference between a quoted rate and what it compounds to, see APR vs APY.

Not advice. This tool applies arithmetic to assumptions you entered. It does not know your circumstances, your tax position or your goals, and it is not a recommendation to buy, sell or hold anything. Past returns do not predict future ones, and no figure here is a forecast.