Is refinancing worth it?
It depends on one number — the term of the new loan compared to what you have left on the old one. A lower rate with a shorter term saves money twice: less interest per dollar and fewer months paying it. A lower rate with a longer term gives back the saving and then some, because it restarts the amortisation from the top of the schedule, where almost every dollar is interest.
The same rate drop, three different answers
A loan with $250,000 left at 7%, paid at $1,800 a month — 286 payments to go. An offer arrives at 6% with $6,500 in closing costs. Here is what happens depending on the term:
| New term | Payment | Monthly change | Total difference | Break-even |
|---|---|---|---|---|
| 30 years | $1,498.88 | −$301.12 | +$31,845 | Never |
| 20 years | $1,791.08 | −$8.92 | −$77,892 | Month 30 |
| 15 years | $2,109.64 | +$309.64 | −$128,015 | Month 28 |
The term that lowers the payment the most is the only one that costs more in total. The term that raises the payment saves the most. The ranking by monthly saving is the exact reverse of the ranking by what you actually pay.
Why the usual break-even misleads
The standard advice says to divide the closing costs by the monthly saving: $6,500 ÷ $301.12 = 22 months. That arithmetic answers the wrong question.
It measures when the saving has repaid the fees. It does not measure when refinancing has actually cost you less — because it does not see that the saving was bought by adding years to the debt. Those years cost interest that the division never counts.
The honest break-even compares, at each month, what each path has cost so far — payments made plus the balance still owed, with fees on the refinancing side. On the thirty-year term above, that moment never arrives. Most refinancing tools do not report this because they are not built to answer “never”.
Three conditions that make it worth it
- The new term ends before the old one would. Or at least no later. A shorter term is the only way to keep the rate drop from being spent on more time.
- You will stay past the real break-even. Not the fee-recovery break-even — the month where the refinanced path is truly cheaper in total cost. If you sell or refinance again before that month, the fees were paid for nothing.
- The rate drop is large enough to absorb the fees. A small rate improvement on a short remaining term may never repay its closing costs, even with a shorter new term — because there are not enough months of saving left.
Where this goes wrong
Taking the monthly saving at face value
On the example above, the thirty-year term drops the payment by $301.12 a month. That is real money every month. It is also $31,845 more over the life of the loan, because 360 months of lower-rate interest on a larger balance costs more than 286 months at the higher rate. The saving exists. The saving is also not the answer.
Your own numbers
The refinance calculator compares any two loans side by side, counting what you pay and what you still owe — not just the monthly figure. It says so when the break-even is never, which is the answer most tools are not built to give.