There may come a time in your homeownership journey when you wonder if it makes sense to refinance your mortgage. It’s a decision that can help you reach goals like lowering your interest rate or giving you access to cash for a home remodel.
If your goal is to save money, you’ll want to calculate the break-even point on a mortgage refinance, which is when the savings from refinancing exceed the costs.
What’s the Break-Even Point on a Mortgage Refinance?
The break-even point on a mortgage refinance is the point at which the money you save with the new mortgage outweighs the closing costs you paid to get it. It’s the number of months before the refinance puts money in your pocket.
Fast Break-Even Calculation
A quick-and-dirty way to determine your breakeven is to divide the refinance costs by the difference between the old and new mortgage payment. You’ll get an approximation of the number of months it will take for the refinance to pay for itself. There are a few cautions:
— This method only works if the terms of both loans are the same — 15-year loan to 15-year refinance, 30-year loan to 30-year refinance, etc.
— It becomes less accurate the older your current loan is. That’s because refinancing can increase the time it takes to repay your balance, which lowers your payment even if it doesn’t actually save you money.
— The most accurate way to calculate your breakeven is to use a high-level mortgage calculator that’s designed to cover all refinance scenarios. The inputs can be complicated, but you’ll get an accurate result.
“I always look at the client’s existing loan and either find out or figure out how much interest they have paid to date. We add this to the total interest to be paid on the new loan so we can do an apples-to-apples comparison and see if the new loan will actually end up costing them more in the long run,” says Katy Song, a certified financial planner and CEO of Katy Song Financial Planning Inc.
Why Should You Calculate the Break-Even Point?
Calculating the break-even point can help you decide whether the timing and circumstances are right to refinance. Even though a lower monthly payment can be tempting, the interest rate isn’t the only factor to consider when deciding whether refinancing makes sense. Other elements to consider include how long you plan to own the home and your current mortgage interest rate.
Anticipated Time in Your Home
If you bought your home when interest rates were higher than average, your ears might perk up when you hear that refinancing and mortgage rates are finally on the decline. But you should make sure you plan to stay in your home long enough to reach — and preferably exceed — the break-even point on a refinance for the costs to make sense.
“If you plan on selling your home in two years but your break-even point is three years, it probably doesn’t make sense to proceed with the refinance,” says Scott Bridges, chief consumer direct lending production officer at mortgage lender Pennymac.
Say that refinancing costs $5,000, and you’ll save $250 per month by doing so. Your break-even point in this case is 20 months.
Your Current Mortgage Rate
If you’re one of the fortunate homeowners with a sub-5% mortgage rate, you likely wouldn’t think of refinancing. “Your monthly payment will be higher, hence no monthly savings, and you’ll never recoup the refinancing costs,” Song says.
But even if current refinancing rates are a bit lower than your current mortgage, Song says that it may not be the best time to refinance. If rates continue to trend downward — as predicted in 2025 — waiting to refinance could translate to more substantial savings.
Of course, break-even points become less important if your current home is where you plan to stay permanently. You might be less concerned with how long it takes to break even if you’re using a cash-out refinance to pay for renovations that you’ll enjoy for years. But even with these refinances, there should be a break-even point. Knowing what that point is can help you determine whether to use your home’s equity or pursue a different way to pay for your upgrades, like a home equity line of credit or home equity loan.
[Read: Best Mortgage Refinance Lenders.]
Does Refinancing Make Sense if You Won’t Break Even?
Knowing your break-even point is only one piece of the mortgage refinance puzzle. There are situations where you may never break even on a refinance, but it could still make good financial sense.
If co-owners of a home divorce or dissolve their relationship, they may need to refinance to take one person’s name off the mortgage or deed. “While the timing might not be ideal due to interest rates, it can be the only way to finalize a divorce and move on to your next chapter,” says Song.
Bridges says that another situation where refinancing might be wise is when high-interest HELOCs exit their interest-only phase and start to amortize, making monthly payments significantly higher and unaffordable. “It could make sense to refinance the HELOC into a fixed-rate mortgage and lock in a lower rate.” With this situation, breaking even isn’t the goal. Instead, you want to avoid high payments, and refinancing can get you a lower payment and interest rate than keeping the HELOC. “And just like the new homebuyer, you’ll probably refinance this loan when rates come down.”
“Rates haven’t changed much, but some lenders seem to be offering some attractive rates in the low 6%’s if there is a relationship,” i.e., investment accounts or cash accounts, Song says.
How to Use a Break-Even Point When Shopping for a Refinance
If the math or circumstance says it’s time to refinance your mortgage, your break-even point can help you choose the lowest-cost lender. After identifying a few companies with competitive advertised rates, Song suggests that borrowers ask those lenders to provide an official loan estimate. A loan estimate is a standardized form designed to make it easy to compare the total costs of any mortgage product.
“This form is especially important for break-even calculation because lenders can hide a bunch of fees or make fees hard to compare,” Song says. She adds that while some lenders may balk at providing a loan estimate, they must give you one within three days once you submit a loan application.
With the loan estimate in hand, you can more accurately calculate your break-even point on every loan. Additionally, you can see any fees not readily apparent on a lender’s website, helping avoid sticker shock when you go to sign the closing papers.
The decision to refinance is personal, and it all comes down to balancing your financial goals and any immediate needs. Yet, as a general rule, Song tells her clients that they should plan to stay in a home for at least five years after refinancing.
“The transaction costs of buying and selling properties are expensive,” says Song. “You need time to recoup those costs; one to two years is normally not enough time.”
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What’s the Break-Even Point on a Mortgage Refinance? originally appeared on usnews.com
Update 05/28/25: This story was previously published at an earlier date and has been updated with new information.
