Refinance break-even: the number that decides it

Costs divided by monthly saving

The same break-even logic the CFPB describes for points applies to a refinance.

The CFPB estimates a break-even period for points by dividing their cost by the monthly saving; a refinance works the same way with its full closing costs. Until that many months have passed, the new loan has cost you money. If you expect to sell or refinance again before then, the refinance loses.

A worked example

Illustrative figures; use the ones on your Loan Estimate.

Suppose you owe $250,000 and could refinance from 7.25% to 6.25% on a new 30-year loan, with $6,000 in closing costs. The principal-and-interest payment drops from about $1,705.44 to about $1,539.29, a saving of about $166.15 a month. The break-even is $6,000 ÷ $166.15, about 36 months.

Watch the term reset

A lower payment can hide a longer loan.

Refinancing into a new 30-year loan restarts the clock. If you were 5 years into your old loan, the new one runs 5 years past the old payoff date, so a lower monthly payment can come with more total interest. Compare the total you will pay over the time you expect to keep the loan, not only the monthly figure — and consider a shorter new term if the goal is to pay less interest overall.

No-cost refinancing is not free

The costs move somewhere else.

The CFPB explains that loans advertised with no lender fees or no closing costs pay for them in one of two ways: a higher interest rate with a credit to cover the costs, or closing costs added to the loan amount. A higher rate means paying more over time; a larger loan means higher payments and less equity. Either can still make sense — but compare it against the version where you pay the costs directly.

Before you apply

Five questions that settle most refinance decisions.

1. How long do you expect to keep the home and the loan?
2. What are the total closing costs, from an actual Loan Estimate?
3. What is the monthly saving, principal and interest only?
4. How many months to break even, and is that shorter than question 1?
5. What happens to total interest if the term resets?