How is the refinance break-even calculated?

Break-even months = closing costs ÷ monthly payment savings. If a refi costs $6,000 and saves $460 a month, it pays for itself in about 13 months — every month you keep the loan after that is genuine savings.

What is the term-reset trap?

Refinancing 24 years left on a mortgage into a fresh 30-year loan drops the payment two ways: the lower rate, and stretching the debt over six extra years. The payment falls but total interest can rise — the honest comparison is lifetime interest on both loans, closing costs included.

When does refinancing NOT make sense?

When you might sell or refinance again before the break-even month (the closing costs never get recouped), when the rate drop is small relative to the costs, or when the term reset quietly adds more lifetime interest than the rate cut removes.

What closing costs should I expect on a refinance?

Typically 2–5% of the loan amount — origination, appraisal, title, and recording fees. 'No-closing-cost' refis roll the costs into the rate or balance; the cost is still there, just spread out, which the lifetime comparison exposes.

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Refinance Break-Even Calculator

A refi is a bet that you'll keep the loan long enough for the monthly savings to pay back the closing costs. This computes the break-even month — and the comparison lenders skip: whether the new loan really costs less over its life, once the term reset is counted.

Your numbers

Results update as you type.

Your current loan

Remaining balance

Current rate

Years left

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The new loan

New rate

New term

yrs

Closing costs

How long will you keep this loan? (blank = the whole term)

yrs

Break-even

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Monthly savings

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New payment (P&I)

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Lifetime interest, after costs

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The lifetime tile compares loans of different lengths — all remaining interest on the current loan vs. all interest over the new one, closing costs included. That mismatch is the point of the comparison, but keep it in mind.

Worth knowing: the refi only pays off if you keep the loan past the break-even — moving or refinancing again before then means the closing costs never get recouped. And "no-closing-cost" offers just move the costs into the rate or the balance; the lifetime comparison is where that shows up.

The two questions a refi has to answer

Question one: how fast do I get my money back? Closing costs are paid up front; savings arrive monthly. Divide one by the other and you get the break-even month. Before it, the refi has cost you money; after it, every month is profit. The whole decision compresses into one comparison — break-even month vs. how long you'll realistically keep this loan. Most people don't keep a 30-year loan for 30 years; if your break-even is 4 years and you might move in 3, the "savings" are a loss.

Question two: does the new loan cost less over its life? This is where the term reset hides. Refinance 26 remaining years into a fresh 30-year loan and the payment drops for two reasons — the lower rate (real savings) and six extra years of stretching (an illusion of savings). A refi can win the monthly comparison and lose the lifetime one. The amber warning above fires whenever your inputs do exactly this.

The formulas

break-even months = closing costs ÷ (old P&I − new P&I)

Each payment comes from the standard amortization formula on the same remaining balance. Lifetime comparison: interest left on the current loan (old payment × months left − balance) vs. interest over the whole new loan, minus closing costs.

Beating the term reset

Two clean fixes if the lifetime number turns against you: refinance into a shorter term (a 15- or 20-year usually carries a lower rate than the 30 as well), or take the 30-year and keep paying your old payment — the difference becomes extra principal, the payoff date stays roughly put, and you've captured the rate cut without the stretch. The second option also keeps the lower payment available as a safety valve in a tight year.

Refinance, or just pay extra on the loan you have?

They're both attacks on the same enemy — total interest — but they work on different levers, and the comparison is worth making before paying closing costs.

A refinance lowers the rate. Every remaining dollar of balance accrues less, and the benefit arrives whether or not your budget changes. The costs are the closing costs, the paperwork, qualifying again — and the term-reset trap this page's lifetime comparison exists to catch.

Extra payments shorten the loan. The rate stays the same, but each extra dollar skips the interest queue and shrinks the balance that interest is charged on for every remaining month. No closing costs, no application, no term reset — and no commitment: stop any month, and nothing bad happens. The downside is that each extra dollar only stops the interest on itself; everything you still owe keeps accruing at the same old rate.

Which lever matters more depends on the gap. A large rate drop is something extra payments can't replicate — no amount of prepaying turns a 7% loan into a 5.5% one. A small rate drop, though, can lose to simply redirecting the closing-cost money into principal, especially if there's any chance of moving before break-even. Running both scenarios — this page for the refi, a mortgage calculator's extra-payment field for the alternative — puts real numbers on it.

Two hybrids worth knowing. Refinancing into a shorter term captures the rate and beats the term reset at once, at the price of a higher required payment. And some lenders offer a recast — keeping your rate and term but re-amortizing after a lump-sum principal payment, usually for a small fee.

The common thread: none of these choices is about the monthly payment. It's about how much interest leaves your pocket before the loan dies, and how confident you are in how long you'll keep it.

Common questions

How big a rate drop is worth refinancing for?

The old "1% rule" (only refinance if the rate drops a full point) is a rough proxy for what actually matters: the break-even math. A 0.5% drop on a large balance can break even quickly; a 1.5% drop on a small balance might not. Run the numbers — the rule of thumb was only ever a shortcut for this division.

Should I pay points for a lower rate?

Points are prepaid interest — the same break-even logic applies, just with a longer horizon. Add the points to the closing costs here and see the new break-even; points typically only pay off if you keep the loan well past it (often 5–7+ years).

What about a cash-out refinance?

Different decision — you're borrowing more, not just repricing. The break-even framing doesn't apply cleanly, and the new (usually higher) rate applies to the whole balance, not just the cash taken out. Compare against a HELOC or home-equity loan before committing.

Do I have to refinance with my current lender?

No — and shopping matters more than people expect. Rate and fee spreads between lenders on the same borrower routinely move the break-even by months. Get at least three quotes on the same day (rates move daily) and compare the loan estimates line by line.

See the refi inside your whole plan

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