Is Refinancing Worth It? The Real Break-Even Analysis

The break-even formula

The break-even point on a refinance is where cumulative monthly savings equal the closing costs of the new loan:

[ \text{Break-even months} = \frac{\text{Closing costs}}{\text{Monthly payment reduction}} ]

If it takes longer than you plan to stay in the home, refinancing loses money.

Worked example

Original loan: $350,000 at 7.25$2,388/month P&I.

Refinance offer: 5.75% on a new 30-year fixed, $6,000 closing costs.

• New payment: ~$2,041/month
• Monthly savings: $347
• Break-even: $6,000 ÷$347 = ~17.3 months

Anything past month 18, you're in the black. Plan to move in 12 months? Skip it.

What the naive formula misses

Break-even months are the headline, but three factors change the real answer:

1. You reset the amortization clock. Refinancing a 27-year-old loan into a fresh 30-year adds 3 years of payments. The refinance calculator shows total lifetime interest, not just monthly.
2. Cash-out increases the balance. If you pull equity out, part of your "savings" is just borrowing again.
3. PMI may change. If your equity crossed 20% since origination, refinancing can drop PMI entirely — a bigger win than the rate cut.

Rule-of-thumb triggers

Refinancing usually pays off when:

• Rate drops by at least 0.75% and you'll stay 3+ years.
• You can drop PMI by refinancing into a conventional loan.
• You want to shorten the term (e.g. 30 → 15) and can afford the higher payment.

Skip it when:

• Break-even is longer than your realistic time horizon.
• The rate cut is under 0.5% with typical 2–3% closing costs.
• You'd extend the term significantly just to cut the payment.

Run the numbers on your loan

Plug your actual balance, rate, and quoted refinance terms into the mortgage refinance calculator — it computes the break-even month and lifetime interest difference automatically.