Mortgage Refinance Break-Even: When Do the Savings Begin?

A lower monthly payment is only part of a refinance decision. Closing costs create an upfront expense, and a longer repayment term can change the lifetime result. Start by comparing the remaining balance, time left on the existing loan, and the terms of the new offer.

A worked example

Suppose a homeowner owes $300,000 at a fixed 7.5% rate with 25 years remaining. A new offer charges 6% over the same 25 years, with $6,000 in closing costs paid separately in cash. These rates are hypothetical inputs, not current lender quotes.

Using standard monthly amortization:

Measure	Estimate
Current principal-and-interest payment	$2,216.97
New principal-and-interest payment	$1,932.90
Monthly payment reduction	$284.07
Closing costs	$6,000
Simple cash-flow break-even	About 22 monthly payments

Divide closing costs by the unrounded monthly saving: $6,000 ÷ $284.0693 = approximately 21.12 months. With payments made monthly, the saving first exceeds the cost after the 22nd payment.

Try this example in the refinance calculator, then replace the inputs with your Loan Estimates.

Check the term as well as the payment

Resetting a partly repaid loan to a longer term can lower the monthly payment while increasing total interest. Compare the time left on the current loan with the full new term. In this example, both terms are 25 years, so the payment reduction comes from the rate change rather than a longer schedule.

What this estimate leaves out

The simple break-even calculation excludes changes to escrow, mortgage insurance, taxes, and the time value of money. It also assumes the stated closing costs are an incremental cash expense rather than refundable deposits or financed costs. Moving, selling, or refinancing again before break-even changes the practical outcome.

The CFPB explains how to compare lender charges and the five-year comparison figures in a Loan Estimate. Use those documents alongside this model, and confirm the offer's actual terms with the lender.

Sources: CFPB: Compare Loan Estimates and Federal Reserve: Mortgage refinancing guide.

Related tool: Loan comparison calculator.