Formula
Monthly savings = current P&I − new P&IBreak-even (months) = closing costs ÷ monthly savingsLifetime change = new P&I × new n + cash costs − current P&I × remaining n How it works
Refinancing replaces your mortgage with a new one, usually to get a lower rate, a different term, or to switch from an adjustable to a fixed rate. The new loan comes with closing costs — typically 2% to 5% of the balance — so a refinance only pays off if you keep the home long enough to recover them.
The break-even point divides the closing costs by the monthly savings. If you expect to move or sell before then, the refinance loses money even though the payment is lower.
Watch the lifetime cost. Resetting a loan with 25 years left into a new 30-year loan lowers the payment partly by spreading the balance over five extra years, which can raise the total interest you pay. Choosing a new term close to the time you have left gives a cleaner comparison.
Frequently asked questions
How much does the rate need to drop to make refinancing worthwhile?
There is no fixed rule. A drop of 0.75–1 percentage point is a common starting point, but what matters is whether the break-even point comes well before you expect to sell or pay off the loan.
Should I roll closing costs into the loan?
Rolling them in avoids paying cash now, but you pay interest on them for the life of the loan and the balance grows. If you can pay them upfront, the long-run cost is lower.
Does this include taxes and insurance?
No. Property tax and insurance usually stay the same after a refinance, so the comparison uses principal and interest only.