The month the new loan pays for itself, counted honestly.

The facts, in one place.

Six quotable sentences on when a refinance pays for itself.

1. The common rule divides the closing costs by the drop in the monthly payment and calls the answer the break-even. It is quick, and it is wrong whenever the new loan's term is not the old loan's remaining term, because a longer term lowers the payment by stretching the principal out, not only by cutting the rate.
2. The truer count is what each loan costs over time: the payments made plus the balance still owed. For any loan that is the original balance plus the interest paid so far, so the new loan is ahead only once the interest it has saved exceeds the closing costs, whether those were paid in cash or added to the balance.
3. Example: $400,000 at 7.0% with 27 years left, refinanced at 6.0% for the same 27 years with $8,000 in costs. The payment falls from $2,751.26 to $2,495.94, the simple rule says 32 months, and the interest count says 24 months. Keeping the home 7 years, the new loan leaves you ahead by about $19,926.
4. The same refinance into a fresh 30 years cuts the payment further, to $2,398.20, and the simple rule improves to 23 months. But the interest over the life of the new loan is $463,353 against $408,685 for the matched term, and the lifetime saving shrinks from about $74,723 to about $20,055. The lower payment is partly the clock being reset.
5. A half-point drop into a fresh 30 years with 20 years left can never pay for itself on interest: $250,000 at 6.5% refinanced at 6.0% with $5,000 in costs has a simple break-even of 14 months, yet the interest saved never catches the costs, and the lifetime interest is about $97,252 higher. The lower payment is a longer loan, not a cheaper one.
6. The break-even answers one question: when the new loan has paid for its costs. The verdict depends on a second one: how long you will keep the home. A refinance that pays for itself in two years and is sold in one was a loss, and one that never breaks even on interest can still be the right choice for a household that needs the lower payment.

By how long you keep the home.

How the verdict moves with the horizon, and with the term.

How the count works.

The rule of thumb every rate sheet carries divides the closing costs by the drop in the monthly payment. It is a fair count only when the new loan's term matches the old loan's remaining term, because a payment can fall for two reasons: the rate is lower, or the principal is spread over more months. The second reason saves nothing; it defers. And a shorter term at a lower rate raises the payment while cutting the interest sharply, and the rule of thumb has no answer for it at all.

The truer count treats each loan as what it costs over time: the payments made plus the balance still owed at any month. For any amortizing loan that sum is the original balance plus the interest paid so far, so the closing costs and the balance drop out of the comparison and what remains is the interest each loan has charged, month by month, against the costs. The new loan is ahead once the interest it has saved exceeds the closing costs, whether those were paid in cash or added to the balance (where they then bear interest themselves). Because the old loan stops charging interest when it ends and a longer new loan does not, the position can turn positive and later turn back, which is the reset-the-clock effect the tool flags. The verdict is read at the year you expect to leave, since a break-even reached after the sale is no break-even.

Methodology.

1. Inputs. The balance today, the current rate and years left, the new rate and term (the years left, or a fresh 30 or 15), the closing costs and whether they are paid in cash or added to the balance, and the years you expect to keep the home.
2. The payments. The level monthly payment for each loan from its balance, rate, and months; the new loan's balance includes the costs when they are rolled in.
3. The simple rule. Closing costs divided by the drop in the monthly payment; no answer when the payment does not fall.
4. The month-by-month count. Each loan is run to its end, accruing interest and applying its payment. The new loan's position at any month is the current loan's interest so far, less the new loan's interest so far, less the closing costs. The true break-even is the first month the position is at or above zero, and the month it later turns negative, if it does, is reported.
5. The horizon and the lifetime. At the chosen year, payments made plus balance owed plus cash paid at closing on each loan, and the difference. Over the full life of each loan, the total interest and the lifetime saving after the costs.
6. The chart. Interest paid so far on the current loan and closing costs plus interest paid so far on the new loan, as two lines that cross at the true break-even.
7. Validation. The scheduled payment on a 30-year $300,000 mortgage at 6 percent ($1,798.65); a loan refinanced into itself with no costs changes nothing, and with costs never breaks even; a one-point drop on a matched term where the simple rule equals costs over the saving and the cost identity holds at the horizon; rolled-in costs starting at the same deficit with a higher payment; a fresh 30 on a loan with 20 years left that breaks even, turns back, and costs more over its life; a half-point drop into a fresh 30 that never breaks even on interest; and a shorter term whose payment rises while the interest count breaks even. A transcription error fails the build.
8. Not modeled. Discounting, the return on the payment saving if invested, points, mortgage insurance, prepayment penalties, escrow changes, the interest deduction, and rate changes on an adjustable loan. Hypothetical throughout. Educational, not advice.

Revision history.

The assumption tools' history.

September 7, 2026

Added should you buy points (the bought-down loan against the plain one on the same principal and term, so the position is the interest saved less the cost of the points; true break-even as the first month at or above zero beside the simple rule; the horizon verdict; the return the points earn to the horizon as the monthly-compounded rate at which their cost equals the present value of the saving plus the lower balance owed, by bisection; the largest points count that pays off within the horizon; and the seller-paid case set against the same dollars off the price).

September 7, 2026

Added two mortgage assumption tools: refinance break-even (the simple rule, closing costs over the monthly saving, beside the month-by-month count of interest paid on each loan, where total cost is the balance plus the closing costs plus the interest so far, so the new loan's position is the interest saved less the costs; the reset-the-clock effect flagged when a longer term catches up), and 15-year or 30-year mortgage (the same cash on both paths, the 15-year payment invested after the loan is gone against the difference invested for thirty years, compared at year 15, year 30, and a chosen horizon, with the break-even return by bisection).

September 7, 2026

Added three assumption tools: Roth or traditional 401(k) (the same take-home cost grown at one return and taxed at each end, so the answer turns on the two rates; the plan limit from the annual record), pay off the mortgage or invest (two month-by-month paths, the extra to the mortgage and then the freed payment invested, against the extra invested throughout, with the optional interest deduction), and how much life insurance (the present value of the income to replace as a growing annuity, plus debts, final expenses, and education, less existing coverage and savings, beside the ten-times-income rule).

September 6, 2026

Added two assumption tools: sell or keep the house (carrying costs and appreciation against rent and the return on freed equity, with the home-sale exclusion), and the long-term care cost projection (today's rate at care inflation to the start year, summed over the years of care, with the set-aside today).

September 4, 2026

First release of the longevity projection (year-by-year, spending and outside income indexed to inflation, a fixed return on the remainder, with the sustainable-spending solver) and the pension-versus-lump-sum comparison (the lump sum invested and paying the pension, with the break-even return solver).

Canonical address: https://consideratecapital.com/tools/refinance-break-even