A refinance is a purchase. You are buying a new set of loan terms, and the price is the closing costs plus whatever the change in term does to your total interest. Most of the disappointment I see comes from people who priced the first half and not the second.
The two questions, in order
Question one: when do the closing costs come back? Divide what you pay out of pocket by what you save each month. That is the break-even, in months, and it is arithmetic.
Question two: does the new loan end later than the old one? If it does, the monthly saving is partly a loan extension, and an extension has a price that never shows up in the payment.
Question one is the one everybody asks. Question two is the one that decides it.
A worked example, both questions
Suppose $268,000 is outstanding on a 30-year loan taken six years ago at 6.75%, with 288 months — twenty-four years — still to run. The payment on that balance is $1,881.55 in principal and interest. A new 30-year loan at 5.875% is available, and the closing costs are $5,400, paid at closing rather than financed.
Every rate in this example is a placeholder. This site publishes none; substitute the two numbers you have actually been quoted.
The new payment is $1,585.32. That is a saving of $296.23 a month, which is real money and arrives immediately.
The break-even is 19 months. $5,400 divided by $296.23, rounded up. Stay in the house past month nineteen and you are ahead on cash. On question one, this refinance is obviously good.
Now question two. The old loan had 288 payments left. The new one has 360. The refinance adds 72 payments — six years — to the end of the loan.
- Interest still to pay on the existing loan, over its remaining 24 years: $273,887.
- Interest on the new loan, over its 30 years: $302,716.
- Plus $5,400 of closing costs.
The refinance that saves $296 a month costs $34,229 more in total. Both things are true at once. The payment genuinely falls and the loan genuinely gets more expensive, because you have spread a smaller rate over a longer time.
The fix costs almost nothing
Take the same refinance at the same rate into a 24-year term instead of a 30-year one, so the loan ends when the old one would have:
- New payment: $1,737.82 — still $143.73 a month less than before.
- Break-even: 38 months.
- Interest over the new term: $232,493, against $273,887 on the old loan.
- Net of the $5,400 in costs, the refinance now saves $35,993.
Same rate, same lender, same paperwork. The only thing that changed is the number of years, and it moved the lifetime result by seventy thousand dollars. Longer break-even, better loan. If you take one thing from this article, take that sentence.
Run both versions on the refinance calculator, which flags an extended term on screen rather than leaving it in a footnote.
When the 30-year reset is still the right call
Matching the old term is not always right. Reset to a longer term deliberately when:
- Cash flow is the actual problem. If the payment is the thing straining the household, buying breathing room is a legitimate purchase and the lifetime cost is what it costs.
- You will not keep the loan. If you expect to move or refinance again within a few years, the back end of the schedule never happens to you and only the break-even matters.
- You intend to overpay. A 30-year loan with a voluntary overpayment behaves like a shorter loan while keeping the lower payment as a fallback in a bad month. Set the overpayment to the difference between the 30-year and the shorter payment and the two schedules are identical — the extra payment calculator will show you that they land on the same month.
What is not legitimate is doing it without noticing. The tell is a conversation in which the monthly saving is the only number anybody says out loud.
The break-even has assumptions of its own
Two things quietly break the simple division:
Your holding period is not your term. The relevant question is not “will I stay 19 months” but “will I still have this loan in 19 months”. Selling, refinancing again, or paying the loan off all end it early.
Closing costs are not a single figure. Lender fees, title, appraisal, recording, and any prepaid escrow are different things and only some are negotiable. Compare Loan Estimates line by line, not by their bottom-right corner. A quote that beats another on rate and loses on fees is common and is exactly what the break-even calculation exists to settle.
Points are the same calculation
If you are offered a lower rate for a fee, that is a refinance-shaped decision inside your refinance: an amount of cash now against a monthly saving later, with a break-even in months. The points calculator runs it, and the answer is very sensitive to how long you hold the loan — on a typical buy-down the break-even lands somewhere in the fifth or sixth year, which is close enough to the median holding period that it is genuinely a coin toss.
The checklist
- Get the exact payoff on the current loan and the exact number of payments left. Not the original term — the remaining one.
- Get a Loan Estimate, not a rate. The rate without the fees is half the price.
- Compute the break-even: out-of-pocket cost divided by monthly saving.
- Compare total remaining interest on the old loan against total interest on the new one, over each loan’s own remaining life.
- If the new term is longer, price the matched-term version too. It takes a minute and it is often the better loan.
- Then decide — and if the answer is no this month, it is not a permanent no.
The refinance calculator does steps three to five together, and the amortisation schedule will show you the balance on either loan in the year you expect to move, which is usually the number that ends the argument.