A simple refinance break-even period is your net refinancing costs divided by monthly payment savings. It is a starting point, not a complete comparison of lifetime interest or your future loan balance.
Choose comparable numbers
Start with the transaction costs of getting the new loan after applicable lender credits. Keep refundable escrow deposits separate from transaction fees, and ask how financed costs change the loan balance.
For payment savings, compare principal and interest on both loans and account for any change in mortgage insurance. Keep property taxes and homeowners insurance separate unless you have a documented reason they change. Otherwise, an escrow change can distort the comparison.
An example: $6,000 divided by $250
Assume a refinance has $6,000 in net transaction costs and reduces comparable monthly payments by $250. Dividing $6,000 by $250 gives 24 months. If you keep the new loan for longer than two years, simple cumulative payment savings exceed the initial costs.
Those numbers are hypothetical, not a Prime Options & Solutions offer. If the monthly savings were $125 instead, the same costs would take 48 months to recover. With no positive monthly savings, this formula cannot show a payment-savings break-even period.
Why the simple calculation can be misleading
A new loan with a longer term may lower payments partly by slowing principal repayment. At the date you sell, you could owe more than if you had kept your existing mortgage. Ask for projected balances at your expected sale date as well as the monthly savings.
The shortcut also does not capture every effect of financed charges, changing insurance premiums, taxes or the value of keeping cash available. A refinance designed to shorten the term may be worthwhile even when it increases the payment and has no simple payment-savings break-even.
Use the result to guide your next question
Compare the break-even period with how long you expect to keep the mortgage—not only how long you expect to own the house. If you expect another refinance soon, today’s costs may not be recovered. Ask Prime Options & Solutions for help organizing the current-loan and proposed-loan numbers before choosing.
- Net transaction costs
- Comparable monthly payment savings
- Expected time keeping the loan
- Balances at the same future date
Sources & further reading
- CFPB: Should I refinance?
- Federal Reserve: A Consumer’s Guide to Mortgage Refinancings (historical educational guidance)
General educational information, not a loan offer or individualized financial, tax or legal advice. Examples are hypothetical. Programs, eligibility, costs and terms vary; approval and savings are not guaranteed. Confirm current requirements with the lender and appropriate advisers.