Refinancing replaces your current mortgage with a new one, often to secure a lower interest rate or change the loan term. While a lower rate reduces your monthly payment, refinancing involves closing costs that you must pay upfront or roll into the loan. Calculating your break-even point helps you see exactly when those upfront costs pay for themselves.
How the refinance formula works
Refinancing involves comparing two separate amortization schedules. First, the calculator finds the monthly payment and remaining interest for your current loan balance over the remaining term. Then, it calculates the monthly payment and total interest for that same balance using your new rate and new term.
Your monthly savings is the difference between the old and new payments. To find the break-even point, the calculator divides your closing costs by the monthly savings and rounds up to a whole month. Lifetime interest saved is the difference between the interest remaining on your current loan and the total interest of the new loan.
Worked example: refinancing a $320,000 balance
For example, suppose you have a $320,000 balance left on a 30-year loan with 28 years remaining at 7.25%. Your current payment is about $2,228. If you refinance to a new 30-year term at 5.5%, your new payment drops to $1,816.92. This yields a monthly savings of $410.78. If your closing costs are $4,500, dividing that cost by your monthly savings gives a break-even point of 11 months. Over the life of the loan, you save $94,415.01 in interest.
Alternatively, you could refinance to a 20-year term at 5.5%. Your new payment is $2,201.24, which only saves you $26.46 a month and extends your break-even point to 171 months. However, because you pay the loan off faster, your lifetime interest saved jumps to $220,210.49.
When refinancing makes sense
Start with the break-even month. If you plan to sell the home or move before you reach that month, refinancing will cost you more than you save. A shorter new term builds equity faster and saves more total interest, but it requires a higher monthly payment. Going back to a fresh 30-year term lowers the payment the most, but it adds years of payments; in the example above you would be paying for 30 more years instead of 28. Monthly savings you invest instead can grow — the compound interest calculator shows by how much.
Limits and assumptions
This estimate assumes you refinance the exact remaining balance into a new fixed-rate loan and pay closing costs upfront. It does not account for cash-out amounts, mortgage points, changes to property taxes and insurance, or the interest you have already paid on your current loan. Actual rates depend on your credit score, home equity, and market conditions. Use the break-even figure as a guide and review official terms with your lender. To size the payment on a new purchase instead, use the mortgage calculator.
Key terms
- Break-even point
- The number of months it takes for your monthly savings to equal the closing costs of the refinance.
- Closing costs
- Upfront fees charged by the lender and third parties to process and finalize the new loan.
- Amortization schedule
- A table detailing each monthly payment, showing how much goes toward principal and how much goes toward interest.
- Loan term
- The amount of time you have to repay the new mortgage, commonly 15, 20, or 30 years.
- Equity
- The portion of your home's value that you actually own, calculated as the current market value minus your loan balance.