What your result means
The monthly break-even divides closing costs by estimated principal-and-interest savings. The lifetime comparison also accounts for the interest implied by each remaining term.
Formula and assumptions
Break-even months = closing costs ÷ monthly payment savings. Lifetime savings = remaining interest on current loan − interest on proposed loan − closing costs.
- Both loans are fixed-rate and the stated balance is refinanced.
- Closing costs are paid in cash, not added to the new balance.
- Taxes, insurance, escrow, points, and cash-out proceeds are excluded.
Worked example
Compare a $300,000 balance at 7% with 25 years left against a new 25-year loan at 6% and $6,000 in costs. Keeping the same remaining term avoids disguising savings by restarting at 30 years.
Limitations
Actual payoff amounts, prepaid interest, escrow refunds, points, taxes, mortgage insurance, recapture rules, cash-out, term changes, and qualification affect the result. A lower payment can still increase lifetime cost if the term is extended.