Refinance break-even: when refinancing is worth the closing costs

The simple formula

The classic break-even is one division:

break_even_months = closing_costs / monthly_payment_savings

If your closing costs are $6,000 and your new payment is $300/month lower, you break even in 20 months. Stay in the loan longer than that and you come out ahead.

What the simple formula misses

A 7% loan refinanced into a fresh 30-year at 6% lowers the monthly payment but stretches your remaining balance over a longer schedule. You may end up paying more total interest even though each month is cheaper.

The fix: keep the same payoff date by using a shorter new term, or by voluntarily prepaying the new loan to match the old payoff schedule. Our refinance calculator shows both the monthly view and the lifetime view side by side.

When refinancing is almost always a good idea

• The new rate is at least 0.5%–0.75% lower than your current rate.
• You’ll keep the home (and the loan) longer than the break-even period.
• Closing costs can be paid in cash — rolling them into the loan eliminates much of the savings.

When refinancing is usually a bad idea

• You’re moving within 2 years.
• The rate drop is less than 0.25%.
• You’d be resetting a near-paid-off loan back to a fresh 30-year term.