When mortgage rates fall, refinancing can cut your monthly payment by hundreds of dollars. But refinancing isn't free — closing costs can run into thousands — and restarting a 30-year clock can quietly increase the total you pay. The key number to understand is the break-even point.
The break-even formula
Break-even (months) = total refinancing costs ÷ monthly savings
If closing costs are $6,000 and your new payment is $300 lower, you break even after 20 months. Stay in the home longer than that and the refinance pays for itself; sell sooner and you lose money.
A worked example
Three years ago you borrowed $320,000 at 7.5% for 30 years. Your principal and interest payment is about $2,237, and you now owe about $310,400. If you keep this loan, you'll pay roughly $414,500 more in interest over the remaining 27 years. Closing costs for a refinance are assumed at 2.5% of the balance — about $7,760.
| New loan | New payment | Monthly saving | Break-even | Lifetime result* |
|---|---|---|---|---|
| 6.25%, 30 years | $1,911 | $326 | ≈ 24 months | Saves ≈ $29,000 |
| 6.25%, 27 years | $1,986 | $252 | ≈ 31 months | Saves ≈ $73,800 |
| 7.0%, 30 years | $2,065 | $172 | ≈ 45 months | Costs ≈ $26,400 more |
*Remaining interest on the old loan minus interest on the new loan and closing costs, if each loan runs to the end of its term.
Three lessons from the example
- A lower payment isn't always a saving.The 7% refinance lowers the payment by $172, but because it stretches the loan back to 30 years, you'd pay about $26,000 more overall.
- Keep your payoff date if you can. Refinancing into a 27-year term (matching the time left on the old loan) saves far more over the life of the loan, even though the monthly saving is smaller.
- How long you'll stay matters. If you might move within two to three years, even a good rate drop may not reach break-even.
What counts as refinancing costs?
- Lender origination and underwriting fees
- Appraisal, title insurance and recording fees
- Discount points (if you pay to lower the rate)
- Prepaid interest and escrow deposits (these move money around rather than being a true cost, but you still need the cash)
"No-closing-cost" refinances roll fees into the loan balance or a higher rate — the cost is still there, just less visible. Compare the lender's Loan Estimate line by line.
Is there a rule of thumb?
You'll often hear "refinance if you can cut your rate by at least 1 percentage point." It's a reasonable starting point, but the break-even calculation is more reliable because it accounts for your actual costs, balance and plans.
A note for UK and European homeowners
In the UK, "remortgaging" usually happens when a fixed-rate deal ends. Leaving a fix early can trigger an early repayment charge (ERC), which should be added to your costs in the break-even formula. The same logic applies to most European fixed-rate mortgages.
Run your own numbers
- Find your current balance, rate and remaining term on your latest statement.
- Enter the new rate and term into the calculator below to get your new payment.
- Subtract it from your current payment, then divide your closing costs by the difference.
- Compare total interest on both loans — not just the monthly payment.
Want to shorten your loan without refinancing? Extra payments can do that with no closing costs — see how extra mortgage payments save you money.