Refinance break-even

The example on this page is a homeowner who owes $280,000 at 7.9%, with 27 years left on the loan. A lender offers a new 30-year loan at 7.4%, the Freddie Mac weekly average as of October 15, 2026, for illustration, with $6,000 of closing costs paid in cash. They expect to stay 7 years. All figures come from our amortization engine; your own rates and costs will differ.

The quick formula, and why it is too optimistic

The monthly principal-and-interest payment falls from $2,093.06 to $1,938.66, a saving of $154.40. Divide the closing costs by that and you get a break-even of 39 months.

That figure counts the lower payment as pure saving. Part of it is not. The new loan runs for 30 years instead of 27, so it repays principal more slowly. Some of the lower payment is simply you paying down less debt each month, which you will pay back later. A fair comparison counts both what you have paid and what you still owe.

The true break-even

Measured that way, payments made plus balance still owed, the refinance is behind by the closing costs on day one and catches up slowly. It comes out ahead at month 57, 4 years and 9 months in, later than the quick formula says.

Over the 7 years the homeowner plans to stay, the old loan costs $427,924 and the new one $425,608, closing costs included. The refinance saves $2,316. That is real money, but much less than $154.40 a month for 7 years would suggest.

If they sold after 2 years instead, the refinance would cost $3,299 more than keeping the old loan. How long you will stay is the single most important input, and the one most people do not think hard enough about.

Keep the remaining term

Resetting to a fresh 30 years is what stretches out the true break-even. Ask the lender for a loan that matches the years you have left. With a 27-year term at the same rate, the payment is $1,999.48, a smaller monthly saving of $93.58, but the break-even arrives at month 52, 4 years and 4 months in and the saving over 7 years rises to $3,874.

You can also take the full new term and pay the old payment amount anyway. The extra goes to principal, and you keep the flexibility to drop back to the lower payment in a hard month.

Rolling the costs into the loan

Many lenders will add the closing costs to the new balance, marketed as a “no cash” refinance. You keep the cash, but you pay interest on the costs for as long as you have the loan. In the example the payment becomes $1,980.21, and the refinance never breaks even within 7 years: break-even is never, within the years kept. The total cost over that time is $428,600, more than keeping the old loan.

A “no-cost” refinance, where the lender pays the costs in exchange for a higher rate, is a different trade. It can make sense when you expect to move or refinance again soon, because there is nothing up front to recover.

Refinancing to a 15-year loan

At 6.71% for 15 years, the payment goes up by $378.48 a month, to $2,471.54. There is no monthly saving at all, yet by the payments-plus-balance measure the refinance pulls ahead at month 20, 1 year and 8 months in and is $31,100 ahead after 7 years. The lower rate and the fast repayment both cut interest. It only works if the higher payment fits the budget comfortably; the affordability guide has the ratios lenders apply.

What goes into closing costs

The Loan Estimate and Closing Disclosure list every charge. Typical items are:

• the lender’s origination charge and any discount points;
• appraisal, credit report and flood certification fees;
• title search and a new lender’s title policy;
• recording fees, and in some states a mortgage or transfer tax;
• prepaid interest and a fresh escrow deposit for tax and insurance.

Prepaid interest and escrow are not true costs of refinancing: you would pay the interest and taxes anyway, and the old escrow balance is refunded. Leave them out when you work out the break-even. Points are prepaid interest that buy a lower rate; on a refinance they are generally deducted over the life of the loan rather than in the year paid, per IRS Publication 936.

Cash-out refinancing

A cash-out refinance borrows more than you owe and hands you the difference. The break-even test does not fit it neatly, because you are also taking on new debt. Compare it instead with the alternatives for the cash: a home equity loan or line of credit leaves the first mortgage, and its rate, untouched. If your current rate is lower than today’s, a cash-out refinance reprices the whole balance upward to borrow a small part of it, which is rarely the cheapest way to raise money.

Other reasons to refinance

Not every refinance is about the rate. Removing a co-borrower after a divorce, switching from an adjustable rate to a fixed one, or dropping FHA mortgage insurance by moving to a conventional loan can all be worth it even without a lower rate. Our PMI guide explains the last one. For each, the same test applies: what it costs now, what it saves each month, and whether you will keep the loan long enough for the second to cover the first.

Every figure on this page is computed by the same code as our calculators. How we calculate.