The refinance break-even formula: closing costs ÷ monthly savings. When a 1% rate drop justifies the cost and how long you need to stay in the home.
Refinancing a mortgage replaces your existing loan with a new one, ideally at a lower interest rate. The decision reduces to a simple comparison: the total closing costs of the new loan versus the monthly savings from the lower rate. The break-even point — the number of months it takes for the savings to cover the costs — is the single most important number in any refinance analysis.
A 1 percentage point rate drop on a $300,000 30-year fixed-rate loan saves approximately $185 per month in principal and interest. If the closing costs are $4,000, the break-even point is $4,000 / $185 = 21.6 months. If you plan to stay in the home longer than 21.6 months, the refinance saves money. If you plan to move sooner, the refinance costs more than it saves.
| Loan Amount | 1% Rate Drop | Monthly Savings | Break-Even ($4k costs) |
|---|---|---|---|
| $200,000 | 6.5% → 5.5% | ~$123 | 32.5 months |
| $300,000 | 6.5% → 5.5% | ~$185 | 21.6 months |
| $400,000 | 6.5% → 5.5% | ~$246 | 16.3 months |
| $500,000 | 6.5% → 5.5% | ~$308 | 13.0 months |
Closing costs on a refinance typically range from 2% to 5% of the loan amount, according to the Consumer Financial Protection Bureau (CFPB). These costs include the application fee, appraisal fee, title search and insurance, origination fee, recording fees, prepaid interest, and escrow funding. Unlike a purchase, a refinance does not involve a real estate commission, so closing costs are lower than a home purchase.
The most common mistake borrowers make is focusing only on the monthly payment reduction without comparing the total interest saved over the life of the loan. A refinance that extends the term back to 30 years may lower the monthly payment but increase total interest paid if the rate reduction is small. For example, refinancing a $300,000 loan with 20 years remaining at 6.5% to a new 30-year loan at 5.5% reduces the monthly payment by about $300 but adds $150,000+ in total interest over the full term. The CFPB recommends comparing the total cost of the old loan versus the new loan, not just the monthly payment.
A rate-and-term refinance lowers the interest rate or changes the loan term without changing the loan balance. This is the most common type of refinance and the one used in the break-even analysis above. A cash-out refinance replaces the loan with a larger one and gives you the difference in cash, which can be used for home improvements, debt consolidation, or other purposes. Cash-out refinancing typically carries a higher interest rate (about 0.25-0.5% more) and stricter underwriting requirements.
In 2026, with mortgage rates at 6.5-7.5%, refinancing to a rate-and-term loan only makes sense if you can lower your rate by at least 0.75-1.0 percentage points. If you are at 7.5% and can get 6.5%, the savings are real. If you are at 6.75% and can get 6.25%, break-even may be too long. The Metriova refinance calculator computes the break-even point, total interest savings, and the optimal loan term for your specific situation, helping you make an informed decision before paying any application fees.
Refinance Calculator — Break-Even & Savings
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