The Break-Even Rule That Could Save You $50,000 on Your Mortgage
Lower rates don't automatically mean refinancing is smart. Here's the simple calculation that reveals whether refinancing will actually save you money.
Your lender says you could save $300/month by refinancing. Sounds great, right? But they're not mentioning the $12,000 in closing costs. Will you actually come out ahead? The break-even rule gives you the answer in seconds.
The Break-Even Formula
It's simple: divide your closing costs by your monthly savings. The result is your break-even point in months.
Break-Even Point =
Closing Costs ÷ Monthly Savings
If you'll stay in your home longer than this, refinancing saves money.
If you'll move sooner, refinancing costs you money.
Real Example
Let's run the numbers:
| Current Payment | $2,100/month |
| New Payment | $1,800/month |
| Monthly Savings | $300/month |
| Closing Costs | $9,000 |
| Break-Even Point | 30 months (2.5 years) |
The verdict: If you'll stay in your home more than 2.5 years, refinancing saves money. If you might move within 2.5 years, keep your current mortgage.
The Hidden Trap: Extending Your Term
Here's where most people get burned. That $300/month savings might come from a lower rate—or from restarting a 30-year loan.
Watch Out: Term Extension Trap
Current mortgage:
22 years left at 6.5%
Total remaining interest: $180,000
Refinance to:
New 30-year at 5.5%
Total interest: $230,000
Your payment dropped $200/month, but you'll pay $50,000 more over the life of the loan.
When Refinancing Makes Sense
Consider refinancing when:
Rates dropped 0.75-1% or more
Smaller drops rarely justify closing costs.
You'll stay past break-even
Planning to move in 2 years? Probably not worth it.
You're not extending your term
Or if you are, you've calculated the true cost.
You're switching from ARM to fixed
Locking in a rate before yours adjusts can save unpredictable pain.
The "No-Cost" Refinance Myth
Some lenders advertise "no closing cost" refinances. There's no free lunch—they're building those costs into your interest rate. You'll pay 0.25-0.5% higher rate for the life of the loan.
Run the numbers both ways. Sometimes paying closing costs upfront for a lower rate saves more in the long run.
The Bottom Line
Don't refinance just because rates dropped. Calculate your break-even point. Compare total interest, not just monthly payments. And never restart a 30-year term unless you've done the math.
The best refinance is one where you come out ahead—not one that just feels like a win.
Run Your Refinance Numbers
See your break-even point and total savings with our refinance calculator.
Mortgage Refinance Calculator