$280,000 balance, rate drops from 7% to 6%
Remaining term: 25 years
New 30-year payment falls by about $300
Closing costs: $7,000
Simple payment break-even: about 23 months
But the five-year balance can be higher after restarting to 30 years
Read the sequence from the starting balance through the trigger or exit date.
Follow the decision over time
Payment break-even
Closing costs divided by monthly savings provides a first screen when loan amount and term are otherwise comparable.
Balance-adjusted comparison
At the expected exit date, add payments made and remaining payoff in each scenario. This exposes term extension that a payment-only test hides.
This decision belongs in The Real Cost of a Mortgage. Use Mortgage Points: Calculate the Rate Buydown Break-Even to check the next assumption, then test the numbers in the Refinance Break-Even Calculator.
Cash-out belongs separately
Cash received is not savings. Add it to new principal and compare the borrowing decision on its own purpose and cost.
Escrow is not always cost
New escrow funding can increase cash to close while the old escrow is later refunded. Model timing separately from nonrefundable fees.
Build the decision timeline
Simple break-even measures how long payment savings recover closing costs. A stronger test also compares remaining balances at the planned exit date because restarting a term can slow principal reduction.
Records for the refinance decision
- Current payoff, rate, payment and remaining term.
- New rate, term, cash costs and financed costs.
- Expected exit date with both projected balances.
- Obtain current payoff and remaining term.
- Model the existing loan from today.
- Model the new loan with fees and exact term.
- Compare cash flows and balances at likely exit dates.
- Stress-test moving earlier than expected.
Timing risks that change the cost
- Dividing cost by payment change when term changes materially.
- Counting cash-out as a benefit.
- Double-counting escrow funding as permanent cost.
- Ignoring a prepayment penalty on the current loan.
Test the dates and balances
Refinance Break-Even Calculator
Find when closing costs are recovered - And whether the new term quietly increases lifetime cost.
Questions this decision usually raises
Is a one-point rate drop enough?
Not by itself. Balance, fees, term and holding period determine break-even.
Should financed costs count?
Yes. They increase principal and interest even if cash due at closing is low.
What if the new payment is higher?
A shorter term can still reduce total interest; compare the objective and full cash flows.
Verify the dates, triggers and limits
This page explains a calculation, not a personal recommendation. Contract rules and consumer protections vary by product and jurisdiction. Check the current agreement and official guidance before acting.