Definition
Refinance break-even is the point when cumulative payment savings exceed closing costs. If costs are $3,000 and savings are $200 monthly, break-even is 15 months. If you might move before break-even, skip the refinance.
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Break-even analysis is crucial before refinancing. Calculate total refinancing costs (appraisal, origination, title, etc.) and divide by the monthly payment savings to determine how many months it takes to recover those costs. If you plan to stay in the home longer than the break-even period, refinancing makes sense. For example, if costs are $3,000 and monthly savings are $200, break-even is 15 months. Life events like planned moves can make break-even irrelevant.
Pro Tip
If you might move within your break-even period, skip the refinance; the costs rarely justify short-term ownership.
Example
Closing costs for your refinance total $4,500, and your monthly payment decreases by $300. Your break-even is 15 months (4,500 ÷ 300); if you plan to stay beyond then, refinancing is worthwhile.