What Is the Break-Even Point on a Refinance?

The break-even point on a refinance is when a refinance has paid for itself in mortgage payment savings. A refinance typically saves you money on your monthly payments, but you’ll have to wait for those savings to outweigh what you spent on refinance closing costs — at which point you’ve “broken even.”

Some homeowners overlook the importance of the break-even point and focus more on their interest rate or APR, but that can be an expensive mistake. We’ll cover how to calculate a break-even point and why it should guide your decisions around refinancing.

What is the purpose of a break-even point?

Calculating a break-even point allows you to quickly see if a mortgage refinance could be financially beneficial. If you need to sell your home at or before the break-even point, you’re not going to save money — in fact, you might end up losing some.

Even if you’re planning to stay in your home past the break-even point, that doesn’t automatically mean you should refinance. You’ll need to think about how long past the break-even point would make a refinance worthwhile to you. We’ll cover how to analyze these scenarios later.

How to calculate a break-even point

The simplest way to calculate a break-even point is to use a special calculator designed for that purpose. LendingTree’s refinance calculator will automatically determine your break-even point, based on an analysis of your refinance closing costs and how much you stand to save by refinancing. Using a break-even calculator is quick and easy, but it’s more of a ballpark estimate.

Tip: You should also use a refinance calculator if you’re refinancing into a shorter loan term, like from a 30-year mortgage to a 15-year mortgage. Since you’ll reach your break-even point through long-term savings on interest and not by saving on your monthly payments, it’s best to have the calculator do this math for you.

If you want to get more exact or calculate a cash-out refinance break-even point, you’ll need to do the calculation yourself. We explain how to do both below.

Calculating a break-even point by hand

You can calculate your break-even point by hand by referencing the detailed information in your loan estimate. Doing the math yourself allows you to be more exact.

Here are the three key steps to calculate your break-even point:

1. Add up your total loan costs

Turn to Page 2 of your loan estimate and look at the number listed in section D, “Total Loan Costs.” This figure includes origination charges and third-party fees.

Avoid using the 'total closing costs' figure

Some lenders recommend using the number listed next to “Total Closing Costs” on Page 2 of your loan estimate instead of the “Total Loan Costs” number. But doing this could give you misleading break-even point results because it includes some ongoing fees. Lenders often require you to deposit funds for these fees into an escrow account before you can close on your refinance, but those funds actually cover your property taxes and home insurance.

2. Calculate your monthly savings

Assuming you haven’t refinanced yet, grab a copy of your most recent mortgage statement to verify your current monthly payment. Subtract the new payment amount from your current monthly payment to get your monthly savings. (If you’ve already closed on your refinance, look back at the final mortgage statement from your original mortgage loan.)

3. Divide your total loan costs by your monthly savings

The break-even point formula is:

Total loan costs ÷ Monthly savings = # of months to reach your break-even point

Calculate a cash-out refinance break-even point

If you have enough home equity, you can replace your current mortgage with a larger loan and pocket the difference in cash. This is called a cash-out refinance, and calculating when you’ll break even depends on what you’re using the cash for. Here are a few examples:

Using your cash-out refinance money to consolidate debt

You’ll first need to calculate your total savings. Do this by adding the monthly payments of the debts you’re paying off to any mortgage payment savings you’d gain by refinancing. Then divide your closing costs by your savings to calculate your break-even point. One caveat: You can’t write off the mortgage interest on your cash-out refi if you use it to pay off debt.

 Learn more about how to decide if you should get a debt consolidation mortgage.

Using your cash-out refinance money for home improvements

You typically want to add value to your home with home improvements, but you won’t know exactly how much value was added unless you get a home appraisal after your projects are complete. However, you can use projected values to guess whether you’re likely to benefit financially from this type of refinance. If the increase in value is more than the renovation costs, then the refinance may be worth it.

→ An added bonus: Extra cash borrowed for home improvements may be tax-deductible.

What does my break-even point mean?

Your life plans — specifically, how long you want to continue owning your home — determine whether a refinance is a good idea for you right now. The break-even point is simply a quick and easy way to make sure your life plans and potential refinance loan work well together.

Here’s how to interpret your break-even point:

→  If your break-even point comes before you plan to sell the home, you have the potential to save money through refinancing. At the very least, you’ll recoup your refinance costs within that time.

→  If your break-even point comes after you plan to sell, refinancing probably isn’t financially beneficial for you. In fact, refinancing could end up costing you a lot of money.

What break-even point means a refinance is worth it?

Even if you’ll break even on your refinance, remember that the break-even point is only when your refinance could begin saving you money. On that day, you’ve actually saved exactly $0!

For a refinance to really be worth your time and effort, you’ll need to own the home well past the break-even point — but how far past? You can answer this question by looking at either money or time.

Money: How much money saved is enough to make a refinance worth it?

For example, let’s say your refinance will save you $200 per month. After a year of refinance paperwork and a cash payment to cover refinance closing costs, you’ll have saved $2,400. While that’s certainly not nothing, it’s up to you whether that’s compelling enough to make a refinance worth it. When evaluating the monetary benefits of a refinance, you’ll want to ask yourself:

• How much savings in a month or year would make this refinance feel worth it? $200 per month may not be much to one person, while to another it represents just enough money to cover an important financial goal, like building an emergency fund.
• How long do I expect to own this home? The longer you plan to stay in the home, the more these refinance savings will stack up. While there are some who might turn their nose up at the $2,400 in annual savings in our example, most people would be enticed by the $48,000 that same loan would save them over 20-years.

Time: How long after your break-even point is enough to make a refinance worth it?

The Consumer Financial Protection Bureau (CFPB) Home Loan Toolkit suggests you should only refinance if you can recoup your costs in two years, likely because life is unpredictable. Even those with plans to stay in their home for more than two years could end up moving unexpectedly. The longer your refinance takes to break even, the riskier it is. If you have to move before you reach your break-even point, you’ll lose money on the refinance.

However, if you’re certain that you’re in your “forever” home, or feel confident you want to stay longer than your break-even period, a refinance can still make good financial sense — even if you won’t break even for more than two years.