A lower monthly payment can be attractive, but refinancing usually involves costs. A break-even estimate shows how long it may take for expected monthly savings to offset the costs assigned to the refinance.
Start with the basic formula
A simple estimate is: relevant refinance costs divided by expected monthly savings. For example, if the costs being evaluated were $4,800 and the estimated monthly savings were $200, the simple break-even period would be 24 months.
That calculation is only as useful as the inputs. Decide which costs are truly incremental, whether lender credits or points are involved and whether any costs are being added to the new loan balance.
Compare more than the payment
A payment can decline because the interest rate is lower, because the term is extended or because costs are financed. Those are different outcomes and should not be treated as interchangeable.
- Current balance compared with the proposed new balance
- Remaining term compared with the new amortization term
- Total interest under a reasonable hold-period assumption
- Cash paid at closing or added to the loan
- Mortgage insurance, escrow and property-cost changes
- The likelihood of selling, moving or refinancing again
Different goals need different comparisons
A rate-and-term refinance may focus on payment, stability or term reduction. A cash-out refinance may be compared with a HELOC or another borrowing source. A borrower moving from an adjustable to a fixed rate may value certainty even when the immediate savings are modest.
Ask for a comparison that reflects the actual goal and expected timeline, then review the official Loan Estimate before making a decision.