A lower rate sounds like an easy win, but a refinance has closing costs. The break-even point tells you how long you need to stay in the home for the saving to beat the cost.
1. The formula
Break-even (months) = closing costs ÷ monthly saving.
2. Examples on a $300,000 balance (30-year fixed, principal and interest)
| Rate change | Monthly saving | Break-even at $4,000 costs | At $8,000 costs |
|---|---|---|---|
| 7.5% to 6.5% | about $201 | about 20 months | about 40 months |
| 7% to 6% | about $197 | about 20 months | about 41 months |
| 7% to 6.5% | about $100 | about 40 months | about 80 months |
| 6.5% to 5.75% | about $145 | about 27 months | about 55 months |
3. Watch the term reset
If you're 5 years into a 30-year loan and refinance into a new 30-year loan, the payment drops partly because the term got longer. Compare total interest over the time you expect to keep the loan, not only the payment.
4. Costs that hide in the quote
Appraisal, title, lender fees and points. Rolling costs into the loan still costs you, with interest. Ask for a Loan Estimate and compare the totals.
5. When it usually doesn't pay
If you may move or sell before break-even, or the rate drop is small and the costs are high, staying put is often cheaper.
Free tools
- Mortgage refinance calculator: https://smartbudgetsheets.surge.sh/calculators/mortgage-refinance-calculator/?utm_source=mataroa
- Mortgage calculator: https://smartbudgetsheets.surge.sh/calculators/mortgage-calculator/?utm_source=mataroa
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=mataroa
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=mataroa
General information, not financial advice. Figures are rounded examples.