Find out how many months it takes for your refinance savings to cover closing costs — and whether refinancing is worth it for your situation.
Refinancing replaces your current mortgage with a new one, ideally at a lower interest rate. The key question is whether the monthly savings justify the upfront closing costs. That's exactly what the break-even calculation answers.
The break-even point is simple math: divide your closing costs by your monthly savings. If refinancing costs $9,000 and saves you $250/month, you break even in 36 months. If you plan to stay in your home longer than that, refinancing makes financial sense.
Refinance closing costs typically include an appraisal fee ($300-$600), origination fee (0.5-1% of the loan), title search and insurance ($700-$1,500), recording fees, and other administrative costs. Total costs usually run 2-5% of the loan amount. Some lenders offer no-closing-cost refinances, but they compensate by charging a slightly higher rate.
If your current rate is close to market rates, making extra principal payments may achieve similar interest savings without the closing costs. However, if you can drop your rate by 1% or more, refinancing and then making extra payments on the new loan gives you the best outcome.
Tip: When comparing refinance offers, ask for the APR (not just the rate). The APR includes fees and gives you a more accurate cost comparison between lenders.
A rate-and-term refinance simply replaces your loan with a better rate or different term. A cash-out refinance lets you borrow more than you owe and pocket the difference. Cash-out refinances typically come with higher rates and should be used cautiously — you're converting equity back into debt.