Refinance break-even calculator: when does refinancing pay off?

The break-even formula

Break-even months = ROUNDUP(total closing costs ÷ monthly saving, 0)

The monthly saving is the difference in principal and interest (P&I) between the current loan and the new one. Property taxes and insurance stay the same whoever holds the loan, so leave them out of both payments. Round up, because the costs are only paid back once a full month of savings has arrived.

Step 1: the current and the new payment

Calculate both payments with PMT so they are comparable. The current loan has 312 months (26 years) left: =PMT(B3/12,B4,-B2) = USD 2,378.00. The new 30-year loan at 6.25% on the same balance costs USD 2,053.42. The monthly saving is USD 324.58.

The rate is divided by 12 and the term is in months, because the payments are monthly. The minus sign in front of the balance makes PMT return a positive payment. The loan amortization schedule guide shows how each payment splits into interest and principal.

Step 2: count only the real closing costs

Add the fees you will not get back: origination fee 1% = 3,335, appraisal 650, title and settlement 2,100, recording and other fees 450, a total of USD 6,535, about 2% of the loan. Refinance costs often run between 2% and 5% of the loan amount, and they vary a lot by lender and location, so use the lender's own estimate. In the US, that is the Loan Estimate.

Leave the escrow deposit out. The USD 3,200 for future taxes and insurance is still your money, and the old lender refunds the old escrow balance. Counting it as a cost pushes the break-even from 21 to 30 months and can talk you out of a good refinance.

Worked example: refinance break-even with closing costs and the term trap

A fictional fixed-rate mortgage with USD 333,500 left and 312 months to go, refinanced into a new 30-year loan at 6.25% (yellow inputs). Rows 9 to 14 total the real closing costs and leave the escrow deposit out. Rows 16 to 20 calculate the break-even and the net saving, and rows 22 to 25 compare the interest over the full term.

Worked example: refinance break-even with closing costs and the term trap

	A	B	C
1	Item	Current loan	Refinance
2	Loan balance	333,500	333,500
3	Interest rate	7.25%	6.25%
4	Months left / new term	312	360
5	Monthly principal & interest	2,378.00	2,053.42
6	Monthly saving		324.58
7
8	Closing costs	Input	USD
9	Origination fee (% of loan)	1.00%	3,335
10	Appraisal		650
11	Title and settlement		2,100
12	Recording and other fees		450
13	Escrow deposit (not a cost)		3,200
14	Total closing costs		6,535
15
16	Break-even (months)		21
17	Break-even (years)		1.8
18	Years you expect to stay		5
19	Net saving by then		12,940
20	Wrong: escrow counted as a cost (months)		30
21
22	Interest still to pay	408,436	405,730
23	Interest saved over the full term		2,705
24	New loan on a 26-year term: payment		2,165.12
25	Interest saved with the 26-year term		66,419

Illustrative rates and costs for a fictional fixed-rate loan. Closing costs vary by lender and location, so use your own lender's estimate. Educational only, not financial advice.

Step 3: break-even month and net saving

=ROUNDUP(C14/C6,0): 6,535 ÷ 324.58 = 20.1, so the refinance breaks even in month 21, after 1.75 years. Before that month you have paid more in costs than you have saved.

The decision then depends on how long you keep the loan. Net saving = monthly saving × months you stay − closing costs. If you stay five years: 324.58 × 60 − 6,535 = USD 12,940. If you sell or refinance again within 21 months, the refinance loses money.

The term-extension trap

A new 30-year loan restarts the clock. With 26 years left on the old loan, the refinance adds four years of payments. Compare the interest still to pay: =B5*B4-B2 = USD 408,436 on the current loan against USD 405,730 on the new one. The 1-point lower rate saves only USD 2,705 of interest over the full term, because the lower payment is spread over 48 more months.

Keep the remaining 26-year term instead and the payment is USD 2,165.12. The monthly saving shrinks to USD 212.88, so the break-even moves to month 31, but the interest saved rises to USD 66,419. A lower payment and a lower total cost are two different goals, so check both.

What the simple break-even leaves out

• Costs rolled into the loan raise the balance and the new payment, so recalculate the saving with the higher balance.
• Points and lender credits trade upfront cost against the rate and have their own break-even.
• The time value of money: a dollar saved in year five is worth less than a dollar paid at closing. An NPV of the savings, including the balance left when you sell, is the full comparison.
• Qualification: lenders recheck income and debts, for example the debt-to-income ratio, before they approve a refinance.

Common mistakes

• Escrow counted as a cost. The escrow deposit is prepaid taxes and insurance that you still own. Including it moves the break-even from 21 to 30 months.
• Rounding down. 6,535 ÷ 324.58 = 20.1 months. After 20 months the costs are not yet fully recovered, so the break-even is month 21.
• Ignoring the new term. A lower payment over 30 new years can save almost no interest: USD 2,705 here, against USD 66,419 when the remaining term is kept.
• Comparing full payments. Taxes and insurance do not change with the lender. Compare principal and interest only.
• Forgetting how long you stay. The break-even only matters against your plans. A refinance that breaks even in 21 months is a loss if you move in 18.
• Costs rolled in but not counted. Financing the closing costs avoids cash at closing, but raises the balance, the payment and the interest.