How to tell if refinancing is worth it
Refinancing replaces your loan with a new one. It costs money up front, so it pays off only if you keep the loan long enough for the monthly savings to cover the closing costs. That point is the break-even.
The formula
Break-even months = closing costs ÷ monthly savings
Worked example
If refinancing costs $6,000 and lowers the payment by $200 a month, you break even after 30 months.
How to use this calculator
Enter your current loan balance, current rate and years remaining, then the new rate and new loan term you have been offered and the closing costs. The refinance calculator shows the current and new payment, the monthly savings, the break-even month in which the closing costs are paid back and the interest on each loan. Compare that month with how long you expect to keep the home and the loan.
More examples: a full refinance comparison
Suppose you owe $300,000 at 7% with 25 years left. Principal and interest are $2,120 a month. A lender offers 6% with $6,000 of closing costs, which is 2% of the loan. These rates are examples, not quotes.
| Option | Monthly principal and interest | Monthly savings | Break-even | Interest left to pay |
|---|---|---|---|---|
| Keep current loan (7%, 25 years left) | $2,120 | None | None | $336,101 |
| New 25-year loan at 6% | $1,933 | $187 | About 32 months | $279,871 |
| New 30-year loan at 6% | $1,799 | $322 | About 19 months | $347,515 |
The 30-year option has the lowest payment and the fastest break-even, but it costs about $11,400 more interest than keeping the current loan, because you pay for five extra years. The 25-year option saves about $56,200 of interest. Both figures are before the $6,000 of closing costs.
Break-even at different savings
With $6,000 of closing costs, saving $100 a month breaks even in 60 months, $200 in 30 months and $300 in 20 months.
What the result means
A break-even that falls well before you expect to sell or refinance again is a sign the refinance can pay off. A break-even later than that means you would pay the costs and leave before earning them back. Look at total interest as well as the payment, since a longer term can lower one while raising the other.
What changes the result
- Rate drop: a bigger gap between the old and new rate means larger monthly savings.
- Closing costs: lower costs shorten the break-even directly. Halving the costs halves the months.
- New term: a longer term lowers the payment but adds interest. A shorter term does the opposite.
- Loan balance: the same rate drop saves more dollars on a large balance than on a small one.
Common mistakes
- Judging the deal on the monthly payment alone and ignoring total interest.
- Refinancing shortly before a move, so the break-even is never reached.
- Adding the closing costs to the new loan and forgetting that you then pay interest on them.
- Comparing a payment that includes tax and insurance with one that does not.
- Buying discount points without checking the payback. A point costs 1% of the loan and often lowers the rate by about 0.25%, though this varies by lender.
Related calculators
Check whether points pay off with the mortgage points calculator. If your goal is to cut interest without a new loan, try the mortgage payoff calculator. To borrow against equity and keep your current mortgage, see the HELOC calculator.
Frequently asked questions
How much does it cost to refinance?
Closing costs usually run 2% to 5% of the loan amount.
Does refinancing restart my loan term?
Yes, if you take a new 30-year loan. A lower payment over a longer term can still mean more total interest.
What is a cash-out refinance?
A new, larger loan that pays off the old one and gives you the difference in cash.
What is a good break-even point for a refinance?
One that comes well before you expect to sell the home or pay off the loan. If you plan to stay five years, a 30-month break-even leaves 30 months of real savings. A 60-month break-even leaves none.
How much lower should the rate be before I refinance?
There is no fixed number. A small rate drop can pay off on a large balance with low closing costs, and a large drop can fail if you move soon. Run your own numbers and look at the break-even.
Should I pay points when I refinance?
Only if you will keep the loan long enough to earn the cost back. One point costs 1% of the loan and often lowers the rate by about 0.25%, depending on the lender.
Can I refinance to a shorter term?
Yes. A shorter term usually raises the monthly payment but cuts total interest, because you borrow the money for fewer years. Check that the higher payment fits your budget first.