Refinance Break-Even: How to Calculate If It Pencils

The simple math that tells you whether refinancing saves you money.

The actual math

Refinancing makes sense when the monthly savings exceed the closing costs over the period you plan to stay in the loan. The formula:

Break-even month = Total refinance closing costs ÷ Monthly payment reduction

If your break-even month is earlier than the month you expect to sell or next refinance, it pencils. If it’s later, it doesn’t.

Example

Existing loan: $250,000 balance, $1,663 principal-and-interest payment.
New loan: same balance, $1,419 payment.
Monthly savings: $244.
Refinance closing costs: $4,000.
Break-even: 4,000 / 244 = 16.4 months.

If you plan to stay past month 17, refinance. Before month 17, don’t.

Why the “1% rule” is wrong

The old rule of thumb — “refinance when rates drop 1%” — assumes a specific loan size and closing-cost structure. On a $100,000 loan with $3,000 closing costs, a 1% drop might take 40 months to break even. On a $500,000 loan with $4,000 closing costs, a 0.5% drop pencils in under 12 months.