Refinancing is a break-even question, not a rate question
A lower rate that takes 71 months to pay for itself is not a good deal if you are moving in three years. Work out the month you get your closing costs back, then decide.
- The number
- Break-even in months
- Rule of thumb
- Under 36 months is interesting
- Figures
- Samples
Find the break-even month
Enter your current balance and rate, the rate you are being offered, and the total closing costs of the new loan. Keep the remaining term the same so you are comparing like with like.
Break-even
You recover your costs in
31 months
$4,900 in costs recovered at $161 a month (2 years, 7 months)
- Monthly saving
- $161
- Verdict
- Usually worth a closer look
You break even in 31 months and save on lifetime interest as well. This one is worth doing.
Book a call- Current payment
- $2,007Principal and interest
- New payment
- $1,846$285,000 over 27 years
- Monthly saving
- $161$1,936 a year
- Net by the time you move
- +$4,778After 5 years, costs included
- Lifetime interest change
- -$52,262Less interest over the full term
- Closing costs
- $4,900Paid at closing
- Break-even date
- Apr 2029If you closed this month
- New loan amount
- $285,000At 6.375% for 27 years
Savings after closing costs
Monthly savings added up, minus what the refinance costs. It crosses zero at the break-even month.
View as a table
| Year | Net savings |
|---|---|
| Closing | -$4,900 |
| Year 1 | -$2,964 |
| Year 2 | -$1,029 |
| Year 3 | +$907 |
| Year 4 | +$2,843 |
| Year 5 | +$4,778 |
| Year 6 | +$6,714 |
| Year 7 | +$8,649 |
| Year 8 | +$10,585 |
| Year 9 | +$12,521 |
| Year 10 | +$14,456 |
Lifetime interest, both ways
Interest still to pay on the current loan against interest plus closing costs on the new one.
Over the full term, refinancing means $47,362 less in interest and costs than keeping the current loan.
How to read this
Divide your closing costs by your monthly saving. That is the month you get back to even. If you sell or refinance again before that month, the refinance cost you money no matter how much better the rate looked.
Keep the remaining term the same on both sides. Resetting a 23-year balance back to 30 years lowers the payment by stretching it, which flatters the comparison and quietly adds years of interest. If you want that trade, make it deliberately.
Watch for a lender credit. Taking a slightly higher rate in exchange for the lender covering costs can produce a break-even of zero months, which is often the right answer when you expect rates to move again.
What it assumes
- Rates used as defaults are placeholders chosen to make the arithmetic readable, not quotes.
- Property tax is entered as an annual percentage of the purchase price and divided by twelve.
- Mortgage insurance is estimated at a sample 0.55% annual factor whenever the down payment is under 20%.
- Homeowner insurance and association dues are whatever you type in; they vary enormously by property.
- Nothing here accounts for your actual credit tier, occupancy, property type or lender adjustments.
All figures are samples for illustration only. A real comparison uses your Loan Estimate, including prepaid interest, escrow funding and any lender credit. Not an offer of credit.
Rates, costs and locks
Not covered here? Call (505) 555-0135 or send us a note. Se habla español.
Because a rate without a file behind it is a guess. Your rate depends on credit tier, loan-to-value, occupancy, property type, loan amount and which lender ends up with the file. Send documents in the morning and you will have real numbers from several lenders in the afternoon.
Only if you will hold the loan past the break-even month. One point is 1% of the loan amount, and what it buys in rate changes daily. We show the break-even in months on the comparison sheet rather than quoting the rate alone.
Once you are under contract and the appraisal is ordered, in most cases. Some panel lenders offer a one-time float-down if rates improve after you lock, and extended locks exist for new construction.
Extensions cost money and worst-case repricing costs more. This is one of the few situations where being a broker helps directly: we have moved a file to a different panel lender mid-process rather than pay a punitive extension.