Factoring in the Costs
To factor in the costs of a refinance, divide your total closing costs by your monthly payment savings. The result is your break-even point in months. Then compare that number with how long you expect to keep the loan, and look at total interest and term, not only the monthly payment.
Key Takeaways
- Break-even months = total closing costs / monthly payment savings.
- If you will likely sell or refinance again before break-even, the refinance probably costs you money.
- Rolling costs into the loan or taking a higher rate for a lender credit changes the math. Count those too.
- Monthly savings are not the whole story. A longer term can lower your payment and raise your total interest.
How do I calculate the break-even point?
Use this formula with principal and interest payments, not full payments with taxes and insurance, since those do not change much with the loan:
- Add up all costs to close, including points and fees you pay out of pocket or finance.
- Subtract your new monthly principal and interest payment from your current one. That is your monthly savings.
- Divide the costs by the savings. That is the number of months to break even.
You can try your own numbers with the refinance break-even calculator.
What counts as a cost?
Include everything you pay to complete the loan. Typical categories are lender or broker fees, appraisal, title and escrow charges, recording fees, and any points. See what are the costs of refinancing for the list. A few notes:
- Prepaids and impounds (property taxes and insurance set aside in escrow) are mostly your own money moving into an account, not a true cost, but you need cash for them at closing. Many borrowers also get a refund of the old escrow balance.
- Financed costs. If you add costs to the balance, you pay interest on them. Count that interest.
- Lender credits. A credit that offsets costs usually comes with a higher rate. That trade is worth modeling, and we explain it in the costs guide.
- Prepayment penalty on your old loan, if any.
- Mortgage insurance changes. Upfront insurance or funding fees add cost, and dropping monthly insurance adds savings.
Why monthly savings are not enough
A lower payment can come from a lower rate, a longer term, or both. These have very different effects on your total cost.
Check total interest
If you are several years into a 30-year loan and refinance into a new 30-year loan, you push your payoff date out. Even with a lower rate, you may pay more total interest unless you keep making your old payment or choose a shorter term. See how much you will save by refinancing for a side-by-side comparison.
Check your time horizon
Break-even assumes you keep the loan until you recover the costs. If you could sell in a few years, a smaller up-front cost, such as a no-closing-cost option, may beat a lower rate with big costs. If you plan to stay for decades, paying points may be worth considering.
Check the opportunity cost
Cash used for closing costs could have gone to savings or other debts. If you finance the costs, you keep the cash but borrow more.
Does it matter if rates might fall again?
It can. If rates drop again, you could refinance a second time, but each refinance has costs and each restart should be measured on its own break-even. Do not refinance repeatedly to chase small improvements, and do not wait for a perfect rate that may not come. Make the decision on the numbers available now.
Common mistakes
- Comparing payments that include taxes and insurance with payments that do not.
- Ignoring the change in term when comparing.
- Forgetting that points paid today raise break-even, while a lender credit lowers it but raises the rate.
- Assuming you will stay long enough without checking your plans.
- Skipping a second opinion. Ask for a written Loan Estimate and compare the same loan amount and term for each option.
Read what to consider before refinancing next, or return to the refinancing a home overview. For tax questions about points or interest, ask a tax professional.
At Lendia, we put the math on the table
At Lendia, we compare your current loan with options from multiple lenders and show break-even, total interest and term side by side. A Licensed Lendia California Loan Officer will tell you when the numbers do not support a refinance. Contact us or get a rate quote now.
Frequently Asked Questions
What is a good break-even period?
There is no universal number. The right answer is shorter than the time you expect to keep the loan, with a cushion in case your plans change.
Should I include escrow in my break-even?
Generally no. Compare principal and interest, then separately plan for the cash needed to fund new escrow accounts.
Does rolling closing costs into the loan change the break-even?
Yes. A larger balance raises your payment and total interest, so recalculate savings using the new payment.
Is a no-closing-cost refinance a good idea?
It can be if you may move soon, because you pay nothing upfront, but the rate is usually higher. See the costs guide.
Can I refinance if I am not at break-even yet on my last refinance?
You can, but check that the new savings cover the new costs and that you are not repeating costs you never recovered.
Rates and terms depend on your situation; approval requires qualification.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.