The Break-Even Formula
Break-Even Point (Months) = Total Non-Recurring Closing Costs / Monthly Payment Savings
Case Study: $4,500 Costs, $250/mo Savings, 18-Month Horizon
On a $380,000 balance moving from 7.25% to 6.375%, savings are $250/month. Dividing $4,500 by $250 yields an 18-month recoupment timeline. Living in the property for 5 years yields $10,500 in pure post-breakeven profit.
The Hidden Trap: The Amortization Clock Reset
Resetting a 30-year mortgage at Year 7 adds seven additional years of compound interest, which can erase all monthly payment savings. Borrowers should request term-matching notes (e.g. 23 years) or pay extra principal.
Checklist: When to Refinance
- Rate reduction of 0.75%+ on long remaining terms.
- Eliminating Private Mortgage Insurance (PMI) or permanent FHA MIP.
- Shortening loan term from 30 years to 15 years.
- Replacing volatile adjustable-rate mortgages (ARMs).
Official Regulatory References
- Federal Reserve Board – A Consumer’s Guide to Mortgage Refinancings.
Model your options with our Refinance Break-Even Calculator.