Refinance break-even calculator: is refinancing worth it?

Every refinance pitch leads with the new payment. The question that matters is whether the savings pay back the cost before you sell or refinance again. This refinance break-even calculator answers it in months, then shows what a new term does to the interest you’ll pay and the balance you’d owe down the road.

How to use the refinance break-even calculator

• Current loan balance, rate and years left. From your latest mortgage statement. The calculator rebuilds your current principal and interest from these, so check that it matches your statement.
• New example rate and term. From a real quote if you have one, at the term you’d actually take.
• Closing costs. Net of any lender credit: lender charges, appraisal, title, settlement and recording. Leave out the new escrow deposit and prepaid interest; they aren’t costs of the refinance.
• Years you expect to keep it. Be honest. This sets how far out the interest and balance comparison runs.
• Roll the closing costs into the new loan. Adds the costs to the new balance instead of paying them in cash.

What the calculator compares

Principal and interest on both loans, nothing else. Taxes and insurance don’t change when you refinance, so they wash out. Mortgage insurance does change, and the calculator doesn’t see it:

• If your conventional loan carries PMI and the new one won’t, add the PMI you’d drop to the savings yourself. $200 from the rate plus $100 of PMI is $300 a month, and the break-even shrinks with it.
• On an FHA loan, add the annual premium to each rate. A 7% FHA loan with a 0.55% annual premium costs like 7.55%.

The full method, lender credits and the escrow refund included, is on my page about when to refinance.

How to read your result

The default refinance

	Current principal and interest (7.25%, 28 years left)	$2,088
−	New principal and interest (6.25%, 30 years)	$1,847
=	Monthly difference	$241

$5,500 of closing costs divided by $241 a month is 23 months to break even.

Hypothetical example at example rates. Not a quote.

Under the pad, two lines tell you what happens over the years you plan to keep the loan. On the defaults, over seven years you’d pay about $20,087 less interest, yet you’d owe about $270,101 on the new loan against $269,917 on the old one. That’s the term-reset trap: part of the lower payment is just stretching 28 years back out to 30, and the calculator flags it when the new term is longer than the years you have left.

What moves the answer:

• The rate gap. At a new rate of 6.75%, the savings fall to $143 a month and break-even to 39 months. At 7%, it’s $93 and 60 months.
• The term. A 25-year loan saves only $109 a month (51 months), but after seven years you’d owe about $256,251 instead of $269,917. A 20-year raises the payment, so the calculator says “Never,” yet you’d owe about $233,796. The savings show up as equity instead of cash flow.
• Rolling the costs in. 27 months instead of 23.
• Your timeline. Sell in two years and a 23-month break-even barely clears.

VA IRRRL and FHA streamline: does the lower payment pay back the costs?

Same math, plus each program’s own tests:

• VA IRRRL. By law the costs have to be recouped through the lower payment within 36 months, with the funding fee left out of that math, and a fixed-to-fixed refinance has to cut the rate at least half a point. More on the VA streamline (IRRRL).
• FHA streamline. The benefit test uses the combined rate, interest plus annual mortgage insurance, and a fixed-to-fixed refinance has to cut it at least half a point. Enter combined rates as the current and new rates to run it here. More on the FHA streamline.

This calculator is built for rate-and-term refinances. Pulling cash out has different math, covered on my cash-out refinance page.

Questions people ask me about this

Is a refinance worth it for $200 a month?

It depends on the costs and how long you’ll keep the loan. $5,500 of costs against $200 a month is about 28 months to break even, a little past my 24-month line. If you’ll keep the loan seven years, that’s an easy yes; if you might sell in two, it’s a no.

How far do rates have to drop before I refinance?

There’s no magic number, because the costs matter as much as the rate. On these defaults, a full point lower breaks even in 23 months and half a point lower takes 39. An eighth of a point is worth about $25 a month on a $300,000 loan, which rarely pays back a second set of closing costs.

Should I roll the closing costs into the new loan?

You can, and it’s how most people refinance without bringing cash. It still costs you. On these defaults, rolling in $5,500 adds about $34 a month and stretches the break-even from 23 months to 27. Check the box to see your version.

Does the new escrow deposit count as a refinance cost?

No. Your old servicer refunds your old escrow balance after the payoff, so the new deposit is your own money moving from one account to another. Leave it out of the closing costs here, along with prepaid interest.

Sources

• U.S. Code, 38 U.S.C. 3709, VA refinance recoupment and rate reduction
• HUD Handbook 4000.1 (Update 18), FHA streamline refinance and annual MIP