Definition
Break-even point
The break-even point is the number of months it takes for the monthly savings from a lower rate or payment to repay the upfront cost of getting it, such as closing costs or discount points. Keep the loan longer than that and the move pays off; sell or refinance sooner and it costs money.
The basic formula is upfront cost divided by monthly saving. The result is in months.
Worked example. A refinance costs $4,500 and lowers the principal-and-interest payment by $150 a month. Break-even is $4,500 / $150 = 30 months. A borrower who plans to stay at least three more years is likely to come out ahead; one who expects to move in 18 months probably should not refinance.
The simple version has blind spots. It compares payments, not total interest, so it can mislead when the new loan has a longer term; a lower payment over 30 fresh years can still mean more interest overall. A more careful comparison looks at the balance and interest paid on each path over the same holding period. Taxes, the opportunity cost of the cash and any change in mortgage insurance can also shift the answer. If closing costs are financed rather than paid in cash, the saving is smaller and break-even moves out.
The same logic applies to discount points, lender credits and choosing between loan offers with different fees. In each case, the question is identical: how long until the cheaper monthly option repays its extra upfront cost? The refinance calculator and mortgage points calculator both report it.
Calculators that use this term
FAQ · 2 questions
Questions about Break-even point
How do I calculate the break-even point on a refinance?
Divide the total closing costs by the monthly payment saving. The answer is the number of months until the savings cover the costs.
Is a short break-even always a good deal?
Not always. If the new loan has a much longer term, you might pay more total interest despite a quick break-even. Compare total cost over the time you expect to keep the loan.
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