Every refinance is a purchase: you pay closing costs today to buy a lower payment for the future. Whether that purchase is wise depends on one number most offers never print — the break-even month, when the accumulated monthly savings finally repay the closing costs. Before it, refinancing has cost you money; after it, it is making you money. This calculator divides your closing costs by the monthly saving to find that month, and then answers the second question: over the whole life of the loans, how much interest does the switch actually save once the costs are counted?
The worked example
A balance of 200,000 at 7% with 25 years left costs 1,413.56 a month, with 224,067.52 of interest still to pay. Refinancing the same balance to 5.5% over 25 years drops the payment to 1,228.17 — a saving of 185.38 a month — and the new loan’s interest totals 168,452.50. With closing costs of 4,000, the break-even is 4,000 divided by 185.38 = 21.6 months, so from month 22 the refinance is ahead. Over the full term, staying costs 424,067.52 in payments; refinancing costs 372,452.50 in payments plus the 4,000 of costs — a lifetime saving of 51,615.02. Both numbers matter: the lifetime figure says the deal is good, the break-even says it is only good if you will still hold this loan in two years’ time.
When the right answer is to do nothing
A break-even beyond your realistic horizon in the home is the calculator telling you to stay put: if the month comes out at 40 and you expect to move in three years, the refinance is a gift to the lender’s fee income. The same applies when the saving is real but tiny — a break-even that depends on twenty years of disciplined staying can be wiped out by one forced move, one job change, one better offer that restarts the clock again. And if rates are falling, waiting has a value of its own: each refinance spends closing costs that the next, cheaper refinance will spend again. The decision the number supports is not “refinance whenever the new rate is lower” — it is “refinance when the break-even month sits comfortably inside the time you are confident you will keep this loan”.
The trap: restarting the clock
Most refinances stretch the balance over a fresh full term, and that alone cuts the payment even at the same rate — you are not saving money, you are rescheduling it, and paying interest for more years. Compare the interest columns, not the payments: if the new loan’s total interest is not clearly lower after costs, the lower payment is an illusion bought with extra years. The cleanest comparisons keep the term equal, as in the example — same 25 years on both sides — so the saving you see is the rate’s work, not the calendar’s. If you do extend the term, consider paying the old payment amount anyway: the difference becomes principal reduction, and the break-even logic only improves.
What belongs in the closing costs
Everything the switch charges you: lender and broker fees, appraisal, notary and registry where they apply, and — easy to forget — any early-repayment penalty on the current loan. If the new lender “pays your costs” in exchange for a slightly higher rate, the costs are not zero; they are hidden in the rate, so compare that offer’s payment and interest columns against a pay-your-own-costs offer at the lower rate. And one honest limit: this calculator compares the loans as contracted. It cannot know whether rates will fall again next year (making today’s refinance tomorrow’s regret), nor whether you will move house in month 14 — which is exactly why the break-even month, not the lifetime saving, is the number to decide by.
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