Refinance Break-Even
Refinance Break-Even
Months of the lower new payment needed to recover the closing costs of refinancing.
When to use: Use to decide whether a refinance is worth it. If you plan to sell or refinance again before the break-even month, the closing costs are not recovered.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| BreakevenMonths | Break-Even (months) | Payments needed to recover closing costs | integer |
| ClosingCosts | Closing Costs | Total cost of the refinance | $ |
| OldPMT | Current Payment | Payment on the existing loan | $ |
| NewPMT | New Payment | Payment on the refinanced loan | $ |
Real-Life Examples
Example 1: Refinancing a Point Lower
A $300,000 mortgage at 6.5% ($1,896.20 a month) is refinanced at 5.5% ($1,703.37) for $4,500 in closing costs.
Given
Step-by-Step
The refinance pays for itself in under two years. Staying in the home longer than that makes it a clear win.
Example 2: Larger Loan, Smaller Rate Cut
A $500,000 mortgage at 6% ($2,997.75) refinanced at 5% ($2,684.11) for $6,000 in costs.
Given
Step-by-Step
Just over a year and a half. The bigger the balance, the more a given rate cut saves each month and the faster costs are recovered.
Frequently Asked Questions
Not by itself. Resetting a loan to a new 30-year term can lower the payment while raising lifetime interest. Compare Total Interest Cost on both loans, not just the payments.
Yes. Financed costs are still costs; they simply appear as a higher balance and payment on the new loan.