Refinance Break-Even: Closing Costs, Rate Drops and Timing

Refinancing can cut payments, but costs are real and immediate. A simple break-even calculation keeps you honest: months to recover costs = total closing costs / monthly payment reduction.

Key takeaways

• Break-even months are the first filter; also check total interest and amortization reset.
• Big rate drops help, but fees, points, and term extension can dilute savings.
• If you’ll move or refi again before break-even, stick with current loan.

Inputs that matter

• Closing costs: appraisal, title, taxes, lender fees, prepaid interest
• Rate drop: new rate minus current rate (effective drop after points/credits)
• Loan term reset: starting a fresh 30-year may lower payment but extend total interest
• Time horizon: how long you will keep the new loan

Example

• Costs: $6,000; Payment reduction: $140/mo → Break-even ≈ 43 months
• If you plan to move in 24–36 months, refi likely poor value
• If you plan to stay 5+ years, likely beneficial, especially without term extension

Step-by-step: evaluate a refinance

1. Ask for a full Loan Estimate (LE) with fees, escrows, and any points/credits.
2. Compute payment delta vs current loan; calculate break-even months.
3. Compare total interest if you reset to 30 years vs keep original amortization.
4. Check prepayment penalties, cash needs, and your 5-year plan.

Worked scenario

• Current: $420k @ 6.9%, 27 years left → payment $2,776
• Offer A: 6.0% 30y; costs $5,800 → payment $2,518; delta $258 → break-even ~23 months; total interest higher if you reset term
• Offer B: 5.5% 20y; costs $6,400 → payment $2,889; delta −$113 (higher payment) but shaves years and interest → better for interest minimization

Common pitfalls

• Focusing only on payment, ignoring term extension
• Rolling costs into loan and shrinking equity
• Overlooking taxes/insurance changes embedded in monthly payment

Quick checklist

• Break-even < time horizon
• Term reset impact calculated
• Fees/points verified and compared across lenders

Use our calculator

1. Open Mortgage Calculator
2. Enter current balance, current rate, new rate and costs
3. Compare total interest and break-even months before deciding

Pro tips

• Avoid resetting term; consider a 20-year or 15-year refi to retain amortization progress
• Watch for prepayment penalties and points disguised in APR
• Keep emergency funds intact; don't drain cash for marginal savings

Myths vs reality

• “Lower payment always means better refi.” → Myth. Extending term can increase total interest.
• “Rolling costs into the loan is harmless.” → Myth. It increases balance and interest; evaluate ROI.
• “APR differences are everything.” → Myth. Compare your actual horizon and amortization.

Glossary

• Break-even: months to recover upfront costs via monthly savings.
• Cash-to-close: total cash required at closing, including escrows.
• Term reset: moving back to a new 30-year clock, affecting total interest.

Related links

• Mortgage Rate vs APR
• Biweekly vs Monthly Mortgage
• Budget/Paycheck Calculator

Rate lock, points and credits

• Lock length affects pricing; longer locks may cost more. Align lock with your closing timeline plus buffer.
• Points buy down the rate; credits raise rate to cut cash‑to‑close. Model breakeven including points, not just rate.
• Combine seller credits with refi cautiously; ensure total cash math still clears.

Cash‑out vs rate/term

• Cash‑out increases balance and may price worse; compare blended ROI of debt consolidation vs keeping mortgage lean.
• Rate/term keeps balance similar; prioritize shorter terms (20y/15y) to preserve amortization progress when payment allows.

Breakeven sensitivity (illustrative)

FAQs (extended)

Will refi reset my escrow? Often escrows are re‑established at close; expect changes to monthly escrow portion.

Can I roll costs into the loan? Yes, but it increases balance and interest; check LTV and ROI.

Is no‑cost refi free? Pricing builds costs into a higher rate; verify total interest vs your horizon.

Glossary

• LTV: loan‑to‑value; influences pricing and eligibility.
• CLTV: combined LTV when seconds/HELOCs exist.
• LE/CD: Loan Estimate/Closing Disclosure; standardized documents of fees and terms.

When not to refinance

• Horizon shorter than breakeven months.
• Payment reduction comes only from a term reset you don’t actually want.
• Emergency fund would be depleted to pay closing costs up front.
• Credit profile likely to improve soon (e.g., paying down util or derogatory aging off) → wait for better pricing.

Decision tree (quick)

1. Will you keep the home past breakeven? If no → do not refi.
2. Can you avoid resetting the term? If yes → favor 20y/15y refi; if no → ensure total interest still falls materially.
3. Are points worth it at your horizon? If yes → buy modest points; if no → consider par or small credit.

Case studies

• Short‑horizon mover: 28 months horizon; breakeven 36 months → skip refi; pursue biweekly or occasional principal‑only payments instead.
• Term‑preserver: 27 years left; refis to 20‑year at small payment increase; total interest slashed and principal builds faster.
• Cash‑out temptation: consolidates 18% cards into mortgage; payment drops but balance rises; chooses instead a separate personal loan with fixed term to keep mortgage lean.

Break‑even pitfalls (watchouts)

• Counting escrow/impounds as “costs”—they’re prepaids you’d pay anyway; separate them from true lender/third‑party fees.
• Ignoring PMI changes—new LTV could add/remove mortgage insurance; include its impact in payment delta.
• Overweighting APR—model actual horizon and total cash instead of relying on one figure.

Refi timeline checklist

1. Compare 3 quotes same day; request Loan Estimates.
2. Lock term appropriate to closing timeline; add buffer.
3. Verify fees, points/credits, and cash‑to‑close.
4. Confirm breakeven < horizon; choose term that preserves amortization progress.
5. Keep reserves intact post‑close; schedule a 30‑day payment audit.