How long until a refinance pays for itself?
A refinance breaks even when the money it saves you each month has added up to what it cost to close: the closing costs divided by the monthly savings is the number of months. Owing $300,000 at 7.5% with 28 years left, a new 30-year loan at 6.25% with $6,000 in closing costs saves $291.45 a month and breaks even in 21 months.
Put in your own loan and quote below. The calculator also shows what each loan costs over its life, because the monthly payment is only half of the answer.
Break-even
21 months (1 year, 9 months)
Your monthly savings of $291.45 repay $6,000 in closing costs in this many months.
- Current principal and interest
- $2,138.60
- New principal and interest
- $1,847.15
- Monthly savings
- $291.45
- Left to pay on the current loan
- $718,570
- Total to pay on the new loan, with costs
- $670,974
- The new loan costs less over its life
- $47,596
A worked example
$300,000 at 7.5% over the 28 years left is $2,138.60 a month in principal and interest. The same balance on a new 30-year loan at 6.25% is $1,847.15, so the refinance saves $291.45 a month. $6,000 ÷ $291.45 = 20.6, so the costs are paid back in month 21.
Over the whole loan, the new one costs $670,974 including the closing costs, against $718,570 still to pay on the current one, a difference of $47,596 less.
What the calculator compares
Principal and interest only. Taxes and homeowners insurance stay the same when you refinance, so they do not change the break-even. If the new loan drops or adds mortgage insurance, that changes the monthly savings too, and your quote will show it.
Questions people ask
What is a good break-even period for a refinance?
One that ends before you expect to sell the home or refinance again. Until the break-even month, the closing costs are larger than what you have saved. After it, every month is money ahead. The shorter it is, the less it matters how long you stay.
Should I add the closing costs to the new loan?
You keep the cash, and you pay interest on the costs for the life of the loan. The new loan is larger, the payment is higher, and the break-even moves further out. In the example on this page, adding $6,000 to the loan makes it $306,000, the payment $1,884.09, and the break-even 24 months (2 years) instead of 21 months.
Can a lower payment still cost more over the life of the loan?
Yes, when the new loan starts the clock over. A new 30-year loan on a balance with fewer years left can lower the payment and break even quickly, yet cost more in total because there are more years of payments. A shorter new term avoids that. Owing $250,000 at 6.75% with 20 years left, a new 30-year loan at 6.25% lowers the payment by $361.62 a month and breaks even in 14 months, but you pay $102,926 more in total because there are 10 more years of payments.
Which closing costs go in the calculator?
On the Loan Estimate, the Total Loan Costs plus Taxes and Other Government Fees. Leave out prepaid interest and the initial escrow deposit for taxes and insurance: those pay bills you would owe with or without the refinance, so they are not a cost of refinancing.
Does a no-closing-cost refinance break even right away?
When a lender credit covers the closing costs, there is nothing to pay back, so the savings start in the first month. The trade is a higher rate than you would get by paying the costs. Enter the costs as zero and the new rate you were quoted to see where that leaves you.
Your next step
See refinance rate options in Rate & Best Fit
You can call me at (843) 765-0000 or schedule an appointment when you are ready or if you have questions.
Educational information, not a loan approval or commitment to lend. A calculator works out what you type into it; it does not approve or deny anyone, and your own figures come from your Loan Estimate. Jeff Moran, NMLS #483943, through C2 Financial Corporation, NMLS #135622. Equal Housing Opportunity.