How to Calculate Your Break-Even Point for a Refinance

If you’re considering refinancing to lower your monthly payments or tap into home equity, you want to ensure it makes financial sense before taking out a new loan. Since refinancing comes with some upfront costs, many homeowners want to know when it’s a good idea to refinance.  

Using our break-even point refinance calculator can give you a clear picture of how long it will take to recoup those costs and start saving money, so you can decide whether it’s the right time to refinance.  

Key takeaways 

• The break-even point helps you figure out when it makes financial sense to refinance your mortgage. 
• Refinancing comes with upfront costs that can range from 2% to 5% of the loan amount. 
• To calculate a refinance break-even point, divide your monthly savings by the cost of refinancing. The result is how many months it will take to recoup costs and start saving. 
• If you plan on selling before your break-even point, refinancing might not be worth it.  

What is the refinance break-even point?

Refinancing works by replacing your existing mortgage with a new loan. Ideally, the new loan will have a lower interest rate and lower monthly payments — but it will also come with some upfront costs.  

Breaking even on a refinance means the overall amount you’ve saved from lower monthly payments is equal to the costs you paid for the new loan. In other words, the break-even point is when you recoup the closing costs on a refinance. After reaching that point, you’ll start saving money. 

One way to figure out how long you’ll need to have the new mortgage before you start saving money is to use a break-even point refinance calculation. This will help you decide if it’s worth it to refinance, or if the costs of refinancing outweigh the potential savings.  

How to calculate the break-even point for a refinance 

To calculate the break-even point for a refinance, you’ll need to have a realistic estimate of your total refinancing costs and your potential monthly savings. 

1. Determine all your refinancing costs 

The first step in calculating your break-even point is determining how much you’ll pay in closing costs to refinance. Refinancing costs vary depending on the lender, the loan amount, the type of loan, and the loan terms. For example, if you choose to purchase mortgage points to reduce the interest rate, you’ll pay more in closing costs in exchange for a lower monthly payment. 

Generally, you can expect to pay closing costs between 2% and 5% of the total refinanced loan amount. So, if you refinance a $200,000 mortgage, it might cost you anywhere from $4,000 to $10,000. Here’s a hypothetical estimate of the closing costs you might pay on a $200,000 refinance: 

• Mortgage points (discount points): $1,000 
• Title insurance: $1,200 
• Loan origination fees: $1,000 
• Prepaid taxes, insurance, and interest: $635 
• Appraisal fee: $400 
• Title search: $150 
• Recording fee: $125 
• Credit report fee: $85 
• Flood certification fee: $25 
• Total closing costs: $4,350 (2.18% of the loan amount) 

2. Calculate your monthly savings 

Once you figure out the upfront costs of refinancing, you’ll calculate the monthly savings on your new mortgage. To find out how much you’ll save, you can use the following calculation: 

• Your new monthly mortgage payment – Your old monthly payment = Your monthly savings. 

Let’s say your previous mortgage payment was $2,236 per month, and your new monthly payment is $1,926. When you subtract $1,926 from $2,236, you get $310, which is your monthly savings.  

Keep in mind that the type of refinance you choose could affect your monthly savings. For example, the primary benefit of a cash-out refinance is that you get a lump sum of cash after closing. Because you’re borrowing more than what you currently owe, you may not save as much on your monthly payments. 

3. Calculate when you’ll break even 

The break-even point refinance calculation uses the total costs of refinancing and the monthly savings from your new loan to determine how many months it will take to recover the upfront expense of refinancing. 

Let’s look at a sample calculation using the same numbers from our earlier examples, which included total closing costs of $4,350 and a monthly savings of $310. As you can see from the equation below, it will take 14 months to break even: 

• Total closing costs ($4,350) ÷ Monthly savings ($310) = 14 months to break even 

Once you know how long it’ll take to break even, you can decide if the savings are worth the costs to refinance your loan.  

Is it worth it to refinance? 

While you might have a lower monthly payment after a refinance, that doesn’t always mean you’re going to save money in the long run. Sometimes, it may not be worth it to refinance, like if: 

• You plan to sell your home soon: Selling before you reach the break-even point means the cost of refinancing will exceed your total savings.  
• You extend the loan term: A longer loan term can lower your monthly payments, but most of the time it also means paying more interest over the life of the loan. 
• Your credit score has decreased: Even if interest rates are lower overall, you may not qualify for the best rates if your credit score has dropped. If that’s the case, consider working on improving your credit score before you refinance. 

Run the numbers with AmeriSave

Refinancing is a big financial decision, and while it could save you money or give you access to cash for home improvements or other expenses, you should always weigh the pros and cons before committing to a refinance.  

Understanding the break-even point on a refinance is one quick and easy way to see if it makes financial sense to replace your existing mortgage with a new one. AmeriSave tools and resources make it easy to understand and compare your options, so you can find the right fit. 

Looking to lower your monthly payment or take cash out? Apply online today. 

Frequently asked questions  

At what point is it worth it to refinance? 

Deciding if a refinance is worth it is a personal decision and often depends on how long you plan to stay in your home. Run the numbers to see how long it will take you to recoup the upfront costs. The sooner you break even, the more you stand to save.  

What is the refinance break-even point formula? 

The break-even point on a refinance tells you the number of months it will take to recoup the costs of refinancing. The formula to calculate the break-even point is as follows: Total closing costs ÷ Monthly savings = Number of months to break even