Mortgage refinance break-even calculator

The two refinance decisions everyone conflates

Most homeowners evaluate a refinance by one metric: "Will my monthly payment go down?" This is the correct short-term question, but it ignores the more important long-term question: "Will I pay more or less in total interest over my remaining loan life?"

These two questions can have opposite answers. A refinance can simultaneously lower your monthly payment and increase your lifetime interest cost by tens of thousands of dollars — a phenomenon called the amortization reset trap.

For a complete household capital allocation framework, see our household capital allocation and debt framework.

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The closing cost break-even equation

$$T_{\text{breakeven}} = \frac{\text{Closing Costs}}{\Delta \text{Monthly P&I}}$$

Where $\Delta \text{Monthly P&I} = P_{\text{old}} - P_{\text{new}}$ (monthly principal and interest payment reduction).

Example:

Current monthly P&I: $2,319 (7.25%, 25 years remaining on 30yr loan started 5 yrs ago) New monthly P&I: $1,986 (5.75%, new 30-year term)

Monthly savings: $333

Breakeven: $9,200 / $333 = 27.6 months (2.3 years)

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The amortization reset trap: The hidden cost

Now model the same refinance including total interest cost:

Refinancing into a new 30-year mortgage saves $333/month but costs an additional $19,260 in total interest versus staying in the original loan. The monthly payment improvement is real; the lifetime cost impact is the hidden trade-off.

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When refinancing genuinely pencils out

Refinancing creates unambiguous financial benefit when:

1. Rate reduction ≥ 1.0–1.5% and you plan to stay in the home beyond the break-even period
2. Refinancing into a shorter term (30yr → 15yr or 20yr) that reduces total interest significantly despite similar or higher monthly payments
3. Cash-out refinancing for high-ROI investments (home improvements that increase property value, debt consolidation from 20%+ interest rates)

Refinancing is financially harmful when:

1. You plan to move within the break-even period (2–4 years for most scenarios)
2. Resetting from 20–25 years remaining to 30 years primarily to lower monthly cash flow burden
3. Rate drop < 0.75% where closing costs consume multiple years of savings

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Closing cost breakdown

Use the Mortgage Refinance Calculator to model your specific rate drop, remaining loan term, and closing costs to calculate both the simple break-even and the total-interest-over-remaining-life comparison.