The break-even idea
Break-even months equal your closing costs divided by your monthly savings. If you will keep the loan and the property longer than that, the refinance may pay off. If you expect to sell or move sooner, it may not.
Closing costs are the fees to set up the new loan, such as lender, appraisal, title and recording charges. The loan estimate your lender provides lists them.
Worked example
Say your payment is $1,850 and a new loan would be $1,710, a saving of $140 a month. Closing costs are $3,600. Break-even is 3,600 divided by 140, about 25.7 months, or just over two years. After five years the net saving is $4,800 ($140 times 60 months, minus $3,600).
If you expect to move in 18 months, you would pay $3,600 to save $2,520, and come out behind.
What the simple math leaves out
Term length is the big one. If the new loan restarts a 30-year clock, a lower payment can mean more total interest even though the monthly figure is lower. Compare total interest, not only the payment.
Rolling the closing costs into the new loan changes the balance and the interest. Cash-out refinances change it again. The break-even calculator is a quick screen, not a full comparison.
Questions to ask a lender
What is the annual percentage rate and the full list of closing costs? Is there a prepayment penalty? Does the quote assume I pay points, and what do they buy? How long is the new term? The federal Consumer Financial Protection Bureau publishes plain-language guides on reading a loan estimate.
Try the calculator
Run your own numbers in the free refinance break-even calculator. It works in your browser and nothing you enter is saved or sent.
Sources
Common questions
How long should I plan to stay?
At least past the break-even point, with some margin. The calculator tells you the number of months.
Do I need to refinance with my current lender?
No. You can shop several. Compare the rate, fees and term on each.
Is this financial advice?
No. It is a calculator for general information. A lender or licensed adviser can look at your whole situation.
This guide is general information, not financial, tax or legal advice. Rates, fees and rules change, so confirm current terms with the lender, store or agency involved. All dollar figures are invented examples.