Testing a refinance against time: breakeven, term resets and total cost
Test 1: simple breakeven
On the bench
Take the closing costs you will pay and divide by how much lower the new monthly principal and interest is. The result is roughly how many months it takes for the savings to cover the costs. If you expect to sell or refinance again before then, the refinance probably costs more than it saves.
Last reviewed against the primary sources listed below.
Use the right lines
- Costs: the total closing costs on the Loan Estimate, minus any lender credits.
- Savings: the difference in principal and interest, not escrow.
Why it is only a start
Simple breakeven ignores how many payments are left on each loan. See the term reset test next.
Breakeven questions
What is a good breakeven period for a refinance?
One that is clearly shorter than the time you expect to keep the new loan.