Refinance Breakeven: When It Pays Off

The breakeven formula

Breakeven months = total closing costs / monthly payment savings. Costs of $6,000 and savings of $300 a month give a 20-month breakeven. Every month you keep the loan after month 20 banks $300; every month before it, you are still repaying the cost of the deal.

Use the true monthly savings: new payment versus old payment on the same balance, not versus what you wish you paid. And use all-in costs: lender fees plus third-party fees plus prepaid items, minus any lender credits that reduce your out-of-pocket cost.

What counts as a closing cost

Origination and application fees, appraisal, credit report, title search and title insurance, recording fees, and discount points you pay to buy the rate down. Prepaid interest from closing day to month-end and initial escrow deposits also hit your wallet at closing, though escrow is your money held for taxes and insurance, not a true cost.

Lender credits work in reverse: the lender covers some costs in exchange for a higher rate. That shortens or zeroes the breakeven but raises the rate, so compare the credit offers lifetime interest against the no-credit version before celebrating.

What a good breakeven looks like

Under 24 months is strong for most borrowers; the savings start compounding quickly and even an unexpected move in year three leaves you ahead. Between 24 and 48 months is reasonable if your plans are stable. Beyond 60 months, you are betting five-plus years of life will go exactly as planned, which is a bet most people lose.

Remember the breakeven only covers costs versus payment savings. If the refinance extends your term, also check lifetime interest: a 30-month breakeven can still be a bad deal if the new loan adds a decade of payments. The calculator above shows both numbers side by side.