You got a refinance quote. The new payment is lower. The Loan Estimate also shows a few thousand dollars in closing costs. So the real question isn't "is the payment lower?" It's "how long until the lower payment has paid for the refinance?"
That's break-even.
The plain math
Closing costs divided by monthly savings = months to break even.
That's it. The answer is how many monthly payments it takes before you're actually ahead.
Before that month, you've spent more than you've saved. After it, the savings are yours.
A worked example (illustrative only, round numbers)
These numbers are made up to show the division. They aren't a quote, and they aren't typical for any loan.
- Example closing costs: $4,800
- Example monthly savings: $200
$4,800 divided by $200 is 24. In this example it takes 24 months, two years of lower payments, to earn back the $4,800. Month 25 is the first month you're ahead.
Change one number and the answer moves a lot. Same $4,800 with $100 a month in savings is 48 months. Same $200 in savings with $2,400 in costs is 12 months.
What the simple number misses
Break-even is a good first filter. It isn't the whole decision. Four things it doesn't see:
1. How long you'll keep the loan. Break-even only pays off if you're still in the house, and still in this loan, after that month. In the example, if you think you'll sell in 18 months, you'd leave before you ever got the $4,800 back. Put your own honest guess next to the break-even month. Selling, moving, or refinancing again all end the clock.
2. Resetting the loan term. Say you have 25 years left and the new loan is a fresh 30. Part of the lower payment comes from the lower rate. Part of it comes from stretching what you owe over five extra years. The monthly savings look bigger, so break-even looks shorter, but you've added years of payments at the back end. Break-even can't show you that.
3. Rolled-in costs. Many refinances let you add the closing costs to the new loan instead of paying cash. That doesn't make them free. You borrow them, pay interest on them, and your new payment is a little higher than it would be if you paid them up front. That shaves the monthly savings, which pushes break-even out.
4. Total interest. A lower monthly payment and a lower total cost are two different things. When the term resets or costs get rolled in, you can pay less each month and still pay more interest over the life of the loan. You need a second number for that.
Check it with BankPricer
Open the Refinance calculator. The tab is called Refinance Break-Even.
- Refinance Type. Pick the one that matches your quote.
- Home Value, Current Loan Balance. Your best estimate of the home's value and the payoff balance from your statement.
- Current Rate. The rate on your mortgage today.
- New Rate. The rate on your refinance quote. Nothing on this page is a BankPricer rate.
- Years Remaining. How many years are left on your current loan.
- New Term. The term on your quote. The tool offers 30, 20, 15, or 10 years. If your quote is something else, pick the closest one.
- Closing Costs. The closing costs from your Loan Estimate. Part of that total can be prepaid items or a deposit into a new escrow account, which aren't the price of the refinance itself. Ask your loan officer which lines are the actual cost, and try it both ways if you're not sure.
- Roll closing costs into new loan. This box starts checked. Leave it checked if you're rolling the costs in. Uncheck it if you're paying cash. On the FHA and VA IRRRL options, a checked box also adds the program's upfront fee (shown under Refinance Type) to the new loan. Unchecked, the tool leaves that fee out completely. If you're paying it in cash, add it to Closing Costs yourself.
Then read three things:
- Monthly Savings. The drop from Current Payment (P&I) to New Payment (P&I). On the FHA options, the tool also counts monthly FHA MIP. Property tax and homeowners insurance aren't part of this tab.
- Break-even. It's your Closing Costs divided by Monthly Savings, rounded up to a whole month. If there's no savings, it says never.
- Lifetime Interest Savings. The interest left on your current loan compared with the total interest on the new one, minus lifetime FHA MIP on the FHA options, and minus the closing costs if you paid them in cash. This is the line for points 2 and 4 above. On a rolled run it counts the interest on the rolled costs but not the costs themselves, so a small positive number can still leave you behind. If it's negative, the refinance costs you more over its life even if the monthly payment drops.
The Refinance read box under the results puts it in plain words. If break-even runs past 60 months, it says to refinance only if you're staying five or more years. If the new loan costs more overall, it says that instead.
Two quick re-runs are worth the minute. Flip New Term to something closer to your Years Remaining and watch Lifetime Interest Savings. Then uncheck the roll-in box and watch Break-even move. On FHA or VA IRRRL, add the program fee to Closing Costs before you do, so you're comparing cash with financed and not fee with no fee.
If you want a second pair of eyes
A calculator result isn't a commitment to lend. A blog post can't lock a rate.
Jeff Shin, NMLS 1041652. Barrett Financial Group, L.L.C. Chicago. Equal Housing Lender. Not a commitment to lend.