How the break-even point is calculated
Refinancing replaces your current loan with a new one, usually at a lower rate, in exchange for closing costs. The break-even point is how long the lower payment takes to pay back those costs. The Federal Reserve's refinancing guide describes the calculation:
break-even (months) = C ÷ after-tax savings
- S
- Monthly savings: current payment − new payment
- T
- Optional tax rate, if the interest is deductible for you
- C
- Closing costs and fees for the new loan
Both payments come from the standard amortization formula: the current loan over the months you have left, and the new loan over its new term. Because a lower payment over a longer term can still cost more overall, the calculator also compares the total paid on each loan, including closing costs paid in cash.
Worked example: the Federal Reserve's numbers
The Federal Reserve guide uses a $200,000, 30-year loan at 6%, refinanced to 5% with $2,500 of costs and a 28% tax rate. With exact payments, this calculator gives:
| Current payment | $1,199.10 |
|---|---|
| New payment | $1,073.64 |
| Monthly savings | $125.46 |
| After-tax savings$125.46 × (1 − 28%) | $90.33 |
| Break-even$2,500 ÷ $90.33 | 27.7 months |
The guide rounds the payments to $1,199 and $1,073 and arrives at about 27 months. Without the tax adjustment, the same refinance breaks even in 20.0 months. Many borrowers do not deduct their loan interest, so leave the tax rate at 0 unless it applies to you.
Watch the loan term
The calculator's default scenario refinances $250,000 at 7% with 324 months left into a 360-month loan at 6%, with $5,000 of closing costs. The payment drops by $220.66 a month and the costs are recovered in 22.7 months. Over the new loan's full term, you would pay $12,534.84 less in total than by keeping the current loan.
| 360-month new loan | $1,498.88 / mo · $12,534.84 lifetime savings |
|---|---|
| 324-month new loan (same as time left) | $1,559.96 / mo · $46,698.50 lifetime savings |
Resetting to a longer term lowers the payment partly by stretching the debt, not only by the lower rate. Keeping the term close to the time you have left shows the true savings from the rate.
Paying closing costs in cash or adding them to the loan
Adding $5,000 of costs to the new loan raises its balance to $255,000 and its payment to $1,528.85. You pay interest on the costs, so monthly savings shrink to $190.69, and the break-even point moves to 26.3 months. A “no-cost” refinance usually works the same way, or charges a higher rate instead. Either way, you still pay the costs.
How to read your results
- Break-even point: refinancing pays off only if you keep the new loan (and the property, for a mortgage) longer than this.
- Lifetime savings: the difference in everything you would pay from now until each loan is repaid. A negative number means the refinance costs more over its life, even if the payment is lower.
- Planning to pay extra on the new loan? The early loan payoff calculator shows how much faster you would finish.
Assumptions
- Both loans are fixed-rate and fully amortizing, with monthly payments at the end of each month.
- The current payment is calculated from the balance, rate and months remaining.
- Break-even = closing costs ÷ monthly savings (after tax if you enter a tax rate), rounded up to one decimal place.
- Lifetime totals include closing costs paid in cash; financed costs are already in the new loan.
- Interest is rounded to the cent each month; the final payment absorbs any rounding difference.
Limitations
- Adjustable-rate loans, interest-only periods and cash-out refinancing are not modeled.
- Property taxes, insurance, escrow and mortgage insurance are not included; they can change with a new loan.
- Whether loan interest is tax-deductible depends on your country and situation. The tax field is a simple adjustment, not tax advice.
- The time value of money is not included in the break-even or lifetime figures.
Frequently asked questions
How long should the break-even point be?
There is no universal number. Compare it with how long you expect to keep the loan. If you might move or refinance again before the break-even point, the closing costs are not recovered.
Do points count as closing costs?
Yes. Discount points paid to lower the rate are an upfront cost. Include them in closing costs, so the break-even point shows whether the lower rate pays for them.
Why can my lifetime savings be negative when my payment goes down?
A new loan with a longer term spreads the balance over more months. The payment falls, but you pay interest for longer, which can outweigh the lower rate. Shorten the new term to compare fairly.
Does this work for car loans and personal loans?
Yes. The math is the same for any fixed-rate installment loan. Enter the payoff balance, the months left and the new offer's rate, term and fees.
Sources
Definitions and rules referenced on this page. Calcendium is not affiliated with these publishers.
- A Consumer's Guide to Mortgage Refinancings
Board of Governors of the Federal Reserve System · United States · Checked October 23, 2026
The break-even method (closing costs ÷ monthly savings) and its worked example. Last updated 2008; still the clearest official description of the method.
- Regulation Z, 12 CFR § 1026.18 — Content of disclosures
Consumer Financial Protection Bureau · United States · Checked October 20, 2026
Definitions of amount financed, finance charge, annual percentage rate, total of payments and prepayment disclosures.
- Regulation Z, 12 CFR § 1026.4 — Finance charge
Consumer Financial Protection Bureau · United States · Checked October 20, 2026
Loan fees, points and service charges as part of the cost of credit.