What is the refinance break-even point?

Most homeowners who refinance do so to save money. However, refinancing costs money – you have to pay closing costs on your new loan. Calculating the break-even point tells how long it takes for that investment to start paying off. A refinance break-even calculator can show you how long it will take for your new mortgage to pay off, and help you decide if taking out a new loan is worth doing.

What is the mortgage refinance break-even point?

The break-even point is how long it takes for the savings you realize on a refinance to recoup the cost of refinancing. This is usually expressed in months.

Let’s look at an example. Refinancing your mortgage will reduce your monthly payment by $300. You have to pay $5,000 in closing costs. To start saving money, you need the savings to exceed the cost. Calculating the break-even point shows that it will take roughly 17 months before your savings exceed the cost.

How to calculate the break-even point on a refinance

Let’s look at the steps to calculating your break-even point.

1. Total the refinancing costs

In most cases, you’ll have to pay closing costs when you refinance your home. Closing costs typically range from 3% – 6% of your loan amount.

Your lender will provide a list of your closing costs in the Loan Estimate, which you receive within 3 days of submitting your application, and finalized in the Closing Disclosure, which you will receive at least 3 days before your scheduled closing.

Here are some typical closing costs you can expect to pay when refinancing:

• Origination fee. The origination fee covers the lender’s costs for processing and underwriting the loan. This is typically 0.5% – 1% of the loan amount.
• Application fee or deposit. Some lenders may charge a separate application fee when they collect all the documentation needed for your loan and start the setup. Others make this fee a deposit that can go toward other closing costs after being taken up front.
• Appraisal fee. Because your home serves as collateral for the new loan, your lender will need to know that the home is fit to live in and that they're not lending more than the home is worth. A home appraisal can range from a few hundred to a few thousand dollars, depending on where you live and the size of the home.
• Escrow fees. Escrow accounts allow you to split up the cost of homeowners insurance and property taxes over the course of the year. When you refinance, you may need to open a new escrow account, and your lender may charge you fees to do so.
• Title costs. A lender’s title insurance policy covers the lender if there’s a future claim to ownership of your house that prevails and you have to move out. Because the terms of the loan are changing, you’ll have to purchase a new one each time you refinance.
• Flood certification. Your lender will make sure that flood maps are updated and that you have appropriate flood insurance coverage if any is necessary.
• Tax service. In a refinance situation, you likely already know what your property taxes are. This service alerts your lender if you miss a tax payment and don't have an escrow account.
• Settlement agent costs. This is the cost for someone to come out and conduct the closing. In some states, this can be someone with notary credentials. In others, an attorney must conduct the closing, which can cost more.
• Credit check fee. Lenders may charge you a fee when pulling your credit report.

2. Calculate the monthly payment savings

Next, you'll want to figure out how much you will save each month by refinancing. To do this, check your current mortgage payment for principal and interest. If you pay for property taxes and homeowners insurance with an escrow account, don't include those payments.

Next, estimate your new principal and interest payments for your new loan. Subtracting this amount from your current payment shows how much you'll save each month by refinancing.

You also can calculate how much you’ll save in total interest, which may factor into your refinancing decision.

3. Determine the break-even point

To determine the break-even point, you divide your closing costs by the amount you save every month. The answer is the number of months it will take for you to break even on refinancing.

Using a refi break-even calculator

The Rocket Mortgage refinance calculator can show you how much you can save each month by refinancing. You'll need to estimate your closing costs – again, typically 3% – 6% of your loan amount – to figure out your break-even point.

FAQ

Here are answers to common questions about the refinance break-even point.

Why does knowing your refinance break-even point matter?

When you refinance your home, you’re taking out a new mortgage, which requires you to pay closing costs. If you plan to sell your home before you reach the break-even point, refinancing will cost you more than sticking with your current mortgage.

What other factors should I consider before refinancing?

Consider the length of your new loan term. If it’s longer than your current term, you'll have a lower monthly payment, but you may end up paying more in interest. Always consider the impact of refinancing in light of your financial and life goals.

How long should it take for me to reach the break-even point?

How long it will take to reach the break-even point depends on how much you're refinancing, your mortgage interest rate, and your loan term.

Can I refinance even if the break-even point is far out?

Yes. Ultimately, the decision to refinance is yours. If you plan to stay in your home for many years, refinancing may be a good idea even if you won't reach the break-even point for some time.

When should I consider waiting to refinance my mortgage?

If the closing costs are high or the interest rate on your new loan would cost you more than you're paying on your original mortgage, waiting to refinance may be a better option. It all comes down to your personal situation. Review the loans you're offered and consider how each payment would affect your finances and goals.

The bottom line: Find your refinance break-even point

There are many reasons to refinance your home. You may want to borrow against your equity to consolidate high-interest debts, pay for home repairs or renovations, or reduce your monthly mortgage payment. But whatever your reason, calculating your break-even point is important to ensure the results save you money.

When you’re ready to refinance,¹ apply today with Rocket Mortgage to explore all your money-saving options.

¹Refinancing may increase finance charges over the life of the loan.

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