Refinancing pays when you stay past the break-even month and loses money when you leave before it. The rate drop is the bait; the time you actually keep the loan is the decision.
How to read the break-even
The monthly saving is simply the old payment minus the new one, on the same balance. Closing costs are paid on day one, so the refinance is losing money until the accumulated saving passes them. Divide one by the other and you have the break-even month; stay past it and the refinance pays, leave before and it does not.
Be honest about the horizon. A borrower who might sell in three years should weight the break-even far more than the rate itself, because a refinance that breaks even in year four never recovers for them.
The formula
Both payments use the standard amortization formula on the current balance. Break-even month = closing costs ÷ monthly saving, rounded up. Net benefit = (old payment − new payment) × months in the term − closing costs. When the new rate is not lower, the saving is negative and the calculator reports no break-even at all — refinancing into a higher rate never pays for itself on the same balance.
The reset trap
A 30-year refinance five years into your loan restarts the clock: lower payment, but ten extra years of payments at the end. The payment comparison here is honest about rate and cost but not about term — if you refinance into a longer term than you have left, compare the total cost rows as well, and consider a shorter new term that keeps your original payoff date.
Frequently asked questions
How much rate drop justifies refinancing?
There is no fixed rule — it depends on the balance, the costs and how long you will keep the loan. The traditional "1% rule" is a shortcut that ignores all three. Compare the break-even month against how long you will realistically stay in the home; anything shorter means no.
Are no-cost refinances really free?
The costs move, they do not disappear: the lender charges a higher rate in exchange for covering closing costs. That can be a good trade if you may move soon — the break-even arrives immediately and you never dig into your savings — but the extra rate runs for the life of the loan.
Should I shorten the term while refinancing?
If the payment still fits your budget, a shorter term usually pays enormously: the rate on 15-year loans is lower, and the interest saved over the term is often several times the closing costs. The monthly saving will be negative — the payment rises — but the net benefit over the term is what to compare.