Refinancing a Loan
A lower rate only saves you money once the upfront cost of getting it is paid off — everything before that is spent catching up, not saving.
What Is It
Refinancing means replacing an existing loan with a new one — usually to get a lower rate, a different term, or to switch from a variable rate to a fixed one (or the reverse). The new loan pays off the old one in full, and you start over under the new terms from that point forward.
Why It Matters
Refinancing isn't free. Closing costs typically run roughly 2–6% of the loan amount, depending on the lender and loan type. A lower rate genuinely saves money over time — but only after enough months pass for the monthly savings to repay those upfront costs. That crossover point is the break-even month: months to break even equals total closing costs divided by monthly payment savings. Refinance shortly before selling the asset or paying off the loan anyway, and the math can work against you even at a meaningfully lower rate.
Quick Example
Refinancing a $250,000 mortgage from 7% to 6%, keeping the same 30-year term, cuts the monthly payment from $1,663.26 to $1,498.88 — a savings of $164.38 a month. At $7,500 in closing costs (3% of the loan amount), breaking even takes about 46 months, just under 4 years.
See how your own numbers break even:
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Related Concepts
Sources & Methodology
- Break-even formula (months to break even = total closing costs ÷ monthly payment savings) verified programmatically, the same standard used for every calculator on this site.
- Typical closing costs of roughly 2–6% of the loan amount reflect general attribution across consumer-lending guides, which vary in their exact quoted range — not a single pinpoint source.