Is a Mortgage Refinance Worth It? Break-Even Math With a Full Example

Step 1: Compare the Payments

The current payment on $280,000 at 7% over 300 months is $1,978.98. The new payment at 6% over 300 months is $1,804.04. The monthly saving is $174.94.

Keep the term comparable. If you refinance into a fresh 30-year loan, the payment falls much more, to $1,678.74, a saving of $300.24 a month, but you have added five years of payments. That lower payment is partly an illusion, because you will pay interest for longer.

Step 2: Add Up the Costs

Closing costs on a refinance usually include an origination fee, appraisal, title insurance, recording fees, and sometimes points. Assume 2% of $280,000, or $5,600. Ask each lender for a loan estimate that lists all fees, and compare the annual percentage rate (APR) as well as the rate.

You can pay the costs in cash or roll them into the loan. Rolling them in raises the balance, which slightly raises the payment and increases total interest, but it keeps cash in your pocket. For the break-even calculation, treat the costs as paid up front.

Step 3: Compute the Break-Even

Break-even months = closing costs ÷ monthly savings = $5,600 ÷ $174.94 ≈ 32 months. If you will stay in the home and keep the loan at least 33 months, the refinance saves money. After 5 years, the net saving is 60 × $174.94 − $5,600 = $4,896.

Over the remaining 25 years, the lower rate reduces total interest by about $52,500 in this example, minus the $5,600 cost. That is the big picture, but the break-even tells you how much risk you are taking if your plans change.

The Term-Reset Trap

If you are 5 years into a 30-year loan and refinance into a new 30-year loan, you restart the clock. A lower payment feels good, yet you may pay more total interest than if you had kept the original loan, even at a lower rate. To avoid this, refinance into a term that matches your remaining time, or keep paying the old payment amount on the new loan so the extra goes to principal.

In the example above, taking the 30-year option at 6% and still paying $1,978.98 a month would clear the loan in roughly 21 years and cost much less in interest than either alternative.

When Refinancing Is Not Worth It

Rule-of-thumb advice that a refinance needs a one-percentage-point drop is only a rough guide. A smaller drop can be worthwhile with low costs or a large balance, and a bigger drop can fail if you plan to move soon. Be cautious if your credit has worsened, your home value has fallen (which can trigger mortgage insurance), or you are using cash-out to fund spending rather than improvements.

Also consider alternatives: a no-cost refinance in which the lender pays closing costs in exchange for a slightly higher rate, or simply making extra principal payments on your existing loan.

A Checklist Before You Apply

Pull your current balance, rate, and months remaining. Get at least three loan estimates on the same day, since rates move. Calculate break-even for each. Check for a prepayment penalty on your current loan. Estimate how long you will stay. Then decide using the number that matters most to your situation: lower payment, lower total interest, or a shorter payoff date.