The direct answer
A refinance break-even estimate compares the refinancing costs you expect to pay with the recurring monthly savings created by the new loan. The simple formula is upfront refinance costs divided by comparable monthly savings, but a sound decision also tests the new loan term, financed costs, points, escrow changes and how long you expect to keep the loan.
Define the true incremental costs
Start with lender charges, points, title and settlement costs, and any other costs caused by the refinance. Separate these from cash movements such as new escrow funding that may be partly offset by a refund from the old escrow account.
To apply the approach to an editable scenario, use the BRRRR Calculator. For the neighboring question, explore Rental Property Calculator.
Compare equivalent monthly payments
Use comparable principal-and-interest payments when estimating savings. If the new loan lowers the payment mainly by extending the remaining term, the apparent monthly savings may overstate the economic benefit.
Test more than one holding period
The CFPB notes that refinancing usually involves closing costs and fees. A break-even that occurs after the date you expect to sell or refinance again is a warning that the upfront costs may not be recovered through payment savings.
Worked example
If refinancing costs $4,800 and lowers the comparable monthly principal-and-interest payment by $160, the simple break-even is 30 months. If you expect to keep the loan only 18 months, the monthly savings alone would not recover those costs.
Common mistakes and limitations
Do not call a refinance “cheaper” solely because the new monthly payment is lower. A longer term, financed costs or points can change the total borrowing cost.
Refinance eligibility, appraised value, seasoning rules, rates and loan costs are lender-specific and are not predicted by this calculator.
Frequently asked questions
How do I calculate a simple refinance break-even?
Divide the incremental refinance costs by the comparable monthly savings.
Should I include escrow deposits in the break-even cost?
Not automatically. Distinguish true transaction costs from timing-related escrow funding and any refund from the prior escrow account.
Sources and further reading
The article’s examples are illustrative arithmetic. The references below provide context for operating, valuation or transaction concepts; they do not endorse the assumptions or the calculator.
- CFPB — What documents should I receive before closing on a mortgage loan?Loan Estimate and Closing Disclosure timing, purpose and borrower review context for covered mortgage transactions.
- CFPB — How should I use lender credits and points (discount points)?Interest-rate, discount-point and lender-credit tradeoffs and disclosure context.
- CFPB — Mortgage refinance — mortgage answers and key termsRefinance definition, closing-cost context and warning that a lower payment can partly result from extending the loan term.
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