The number of months it takes for your refinance savings to cover your refinance closing costs. Past this point, the refi is saving you real money.
The break-even point is the key math behind every refinance decision. It's the number of months it takes for the savings from your new lower payment to recoup the cost of doing the refinance.
Simple formula: Closing costs ÷ Monthly savings = Break-even months.
If your refinance costs $7,000 and saves you $250/month, your break-even is 28 months — about 2.3 years. If you'll be in the home longer than that, the refi makes sense. If you might move or refinance again sooner, it doesn't.
Two caveats: (1) Don't roll closing costs into the loan and then ignore them in your break-even math — they still count as a cost. (2) If you're going from a 30-year back to a 30-year, you're restarting the amortization clock, which means you'll pay more total interest even at a lower rate. Sometimes a 20-year or 15-year refi is the smarter play.
Example
Refi closing costs $7,200. New payment saves you $278/month. Break-even = $7,200 ÷ $278 = 26 months. You plan to stay at least 5 more years, so the refi nets you about $9,500 in savings over that period.
Formula
Break-even months = Total refinance closing costs ÷ Monthly payment savings
Also known as
refinance break-even, payback period, recoup period