When Does Refinancing Break Even? One Formula

A broker called me in 2021 and told me he could save me two hundred dollars a month. He was right about the two hundred dollars. He did not lead with the six thousand four hundred, and I did not ask, because he had said the word save and I had stopped listening.

The only formula you need

Closing costs divided by monthly saving. That is the whole thing. The answer is the number of months you have to stay in the house before the refinance has paid for itself, and every month before that one you are behind.

$6,400 divided by $158.67 is 40.3, so month forty-one. Sell or refinance again before then and the deal took money off you.

Where the two numbers come from

The monthly saving is the difference between the payment you have and the payment you are being quoted. A $320,000 balance at a 7 per cent example rate over thirty years costs $2,128.97 a month.

The same balance at 6.25 per cent costs $1,970.30. The difference is $158.67.

The closing costs are appraisal, origination, title work, recording and lender fees, and on a refinance they commonly land somewhere between 2 and 5 per cent of the loan. On $320,000 that is $6,400 to $16,000, which is a wide enough range that guessing is useless.

You do not have to guess. Within three business days of your application the lender has to give you a Loan Estimate, and the total sits in the Costs at Closing box on the front page. That is the number that goes on top of the division.

Same rate drop in every row. The only thing changing is what the lender charges you to get there, and it moves the break-even from under two years to nearly seven.

Three things the formula leaves out

The clock resets. A fresh thirty year loan on a mortgage you have already been paying for five years is thirty-five years of payments in total, so the monthly number falls while the lifetime interest can quietly rise. Two fixes: refinance into a shorter term, or keep sending the old payment into the new loan, which puts the entire $158.67 straight against principal.

A no cost refinance is not free. The costs are either rolled into the balance, in which case you are borrowing them at the new rate for thirty years, or bought with a higher rate, in which case the monthly saving shrinks and the same formula runs on smaller numbers. Ask which of the two it is and make them answer.

And the rate you are quoted is yours, not the market's. Mortgage pricing moves with your credit score, your loan to value, whether the house is your primary residence, the size of the loan and how long you lock for. A rate you read on a website is an advertisement aimed at somebody with a different file.

The question that decides it

Before any arithmetic, answer one thing honestly. How long are you staying in this house?

Under five years, a refinance with ordinary closing costs is usually a poor trade unless the rate drop is unusually large. Twenty years, and almost any genuine rate reduction wins eventually. That single answer does more work than any quote you will be given.

Do the division today

Take the closing cost total from the Loan Estimate and divide it by the difference between your current payment and the quoted one. Both numbers are already on documents you have.

Then write the answer down as a date rather than a count of months. Forty-one months from now is a specific month in a specific year, and you will know immediately whether you expect to still be living there.

My broker's version broke even in month thirty-two. I moved in month twenty-six. I still think about the two hundred dollars, which is exactly how the sentence was designed to work.

Two things that make the saving look bigger than it is

Part of any lower payment is a longer amortisation rather than a lower rate, and the monthly number alone cannot tell you which. A clean way to separate them: ask the lender to quote the same rate over a term matching the years left on your current loan.

If the payment still falls, the rate did the work. If it does not, the calendar did.

The other is the month you appear to skip. Mortgage interest is paid in arrears, so a refinance usually lands with no payment due for a month and it feels like a gift.

It is not. The interest for that period is settled inside the payoff of the old loan, out of the new balance, which means you borrowed it.

The cheaper thing to ask about first

If what you want is a lower payment rather than a lower rate, ask your current servicer whether the loan can be recast. You pay a lump sum against principal, they re-amortise the remaining balance across the remaining term, and the payment drops. Same rate, same end date, and a fee that is usually a few hundred dollars rather than a few thousand.

Not every loan allows it and no lender advertises it, because there is nothing in it for them. It is one phone call and the words are: can this loan be recast, and what does it cost.

One more line on the closing paperwork

Your old loan almost certainly holds an escrow account, the pot your servicer keeps for property tax and insurance. When that loan is paid off the balance has to be refunded to you, usually inside a few weeks, while the new lender collects a fresh escrow cushion at closing.

So you pay twice and get half of it back later. It distorts the cash you need on the day and has nothing to do with whether the refinance is a good idea, so keep it out of the break-even and put a reminder in to chase the refund.