Mortgage refinance break-even: why closing costs ÷ monthly savings gets it wrong

By DecisionSheet · Updated October 1, 2026 · 2026 tax figures

The usual refinance break-even is closing costs divided by the monthly payment saving: if the new loan costs $8,000 to take out and lowers the payment by $266.43, it pays for itself after 31 months. That arithmetic is easy and it answers the wrong question. A lower payment is not all saving. Part of it is principal paid off more slowly, because a new 30-year term spreads the balance over more months than the old loan had left.

This page works one refinance through month by month and measures the break-even on interest, which is the cost that actually goes away.

The example

• Current loan. $380,000 owed at 7.75%, with 27 years (324 payments) left. Principal and interest: $2,802.24 a month.
• New loan. The same $380,000 at 7.03% over 30 years. Principal and interest: $2,535.81 a month. 7.03% is the Freddie Mac survey's average 30-year fixed rate as of September 24, 2026 (Freddie Mac PMMS); an actual quote depends on credit, points and the loan.
• Closing costs. $8,000, about 2.1% of the balance, paid in cash. This is an assumption for the example; the real figure is on the Loan Estimate a lender must provide (CFPB).

The payment falls by $266.43 a month. $8,000 divided by $266.43 is 31 months, rounded up: 2 years 7 months.

Why payment savings overstate the gain

In the first month, the old loan charges 7.75% ÷ 12 on $380,000 and the new one 7.03% ÷ 12. The difference is $228.00: that is the interest the refinance saves. The other $38.43 of the $266.43 drop is principal that would have been repaid under the old loan and now is not. It is still owed, and it is paid later.

So compare the two loans the way a sale or payoff would: at any month, what has been paid so far plus what is still owed. For the old loan that is today's balance plus the interest paid so far. For the refinance it is the closing costs, plus today's balance, plus its interest so far. The difference is interest avoided minus closing costs, and the refinance is ahead once that turns positive.

"Ahead by" is interest saved minus the $8,000 of closing costs. At 3 years the payments saved already exceed the closing costs, which the rule of thumb counts as a win, yet the refinance is still $95 behind. Measured on interest, it first comes out ahead in month 37 (3 years 1 month), 6 months later than the simple figure.

The gap depends on how much of the payment drop is interest. With a deeper cut, to 6.50%, the payment falls by $400.38, most of it interest, and the two methods nearly agree: 20 months by the rule of thumb, 21 on interest. The smaller the rate cut, the more of the drop is just slower principal, and the more the rule of thumb flatters the refinance.

Resetting the clock to 30 years

The old loan had 27 years left. The new one runs 30. Paid on schedule to the end:

Despite the lower rate, the new loan costs $4,968 more interest over its life, because it charges interest for 3 more years on a balance that falls more slowly. Add the closing costs and a borrower who keeps the new loan to the end finishes $12,968 behind simply keeping the old one. In this example the refinance stays ahead from month 37 to month 315 (26 years 3 months) and falls behind after that.

Open the current loan · Open the new loan.

Keep paying the old payment

The fix for the reset is to refinance and keep paying what you paid before. On the new loan, $2,802.24 a month is the new $2,535.81 plus $266.43 toward principal. The calculator models exactly that as an extra monthly payment.

The tiles measure against the new loan's own 30-year schedule, whose interest is $532,892. Against the old loan, which is the comparison that matters here:

the new loan is paid off in 271 months (22 years 7 months), 53 months before the old loan would have been, for the same monthly outlay. Interest from today falls from $527,924 to $378,911, a saving of $149,013, or $141,013 after the closing costs. Open this scenario.

The same panel raises the next question: whether the $266.43 is better put against the loan or invested. That is the prepay-or-invest comparison the calculator was built for. Its break-even market return here is 7.26%; at the calculator's default 8% assumed return, investing the saving ends $39,183 ahead after 30 years.

Pay off a 3% mortgage or a 7% mortgage early? explains how that break-even is found and why an assumed return is not a guaranteed one.

Rolling the closing costs into the loan

A "no cash" refinance adds the costs to the balance. Here the new loan becomes $388,000, the payment $2,589.20, and the monthly drop $213.04. The costs are now repaid with interest at 7.03%, and the interest break-even moves to month 47 (3 years 11 months). A "no closing cost" refinance that charges a higher rate instead works the same way: the cost is in the rate, and it shows up as a smaller interest saving each month.

Cash-out refinancing

A cash-out refinance borrows more than the current balance and hands over the difference. The new payment then covers two things, the old debt at a new rate and a new loan, so comparing it with the old payment says little about either. Split it: run the break-even above on the balance you owe today, and judge the cash taken out as new borrowing at the new rate over the new term, against whatever else that money could have been borrowed with.

Assumptions and limits

• Fixed-rate loans on both sides, interest charged monthly at one-twelfth of the annual rate.
• Closing costs are a single assumed figure paid at closing. Points, lender credits, prepaid interest and escrow deposits are not modeled separately.
• The break-even compares what has been paid plus what is still owed. It does not discount future dollars or credit the borrower with returns on the money the lower payment frees. Either would move the break-even, in opposite directions.
• Pre-tax throughout: no mortgage interest deduction, which applies only to those who itemize (IRS Publication 936).
• Property tax and insurance are left at zero; they are the same with either loan.
• The calculator has no refinance mode. It models one loan at a time, so each loan above is its own scenario, entered with the balance as the price and no down payment. The break-even months and the table are computed from the same amortization formula and checked against the calculator's payments, interest totals and payoff months.

Method and sources

Each loan is amortized month by month with the standard fixed-rate payment formula used by calculateMortgage in the mortgage payoff vs. invest calculator. The calculator's own runs, linked above, produce the same payments, total interest and payoff dates. The refinance's lead at each month is the old loan's interest to that month, minus the new loan's, minus closing costs; the break-even is the first month it is not negative.

• Freddie Mac, Primary Mortgage Market Survey: 30-year fixed-rate average of 7.03% as of September 24, 2026.
• CFPB: Loan Estimate explainer: the form that itemizes a loan's closing costs.
• IRS Publication 936, Home Mortgage Interest Deduction: mortgage interest is deductible only when deductions are itemized. Not applied here.

Open this scenario in the calculator

All figures on this page come from the Mortgage Payoff vs. Invest calculator. Change any input there and the numbers update.