Refinance Break-Even: When a Lower Payment Costs More Interest
The monthly savings and the lifetime interest are different questions. A refinance can cut the payment, repay its closing costs in under two years, and still cost more interest than the loan you already have — if the new note starts the 30-year clock over.
The example is the calculator’s sample, five years in: $300,000 at 6.5% for 30 years, payment $1,896.20. Closing costs are $4,500 paid in cash, not added to the balance. That fee is an illustration so the division is visible. Your fee is the number on a loan estimate. This is not a suggestion to refinance.
Where the sample stands after 60 payments
Sixty payments retire $19,167.07 of principal. The balance is $280,832.93. Interest paid in those five years is $94,605.18 — most of the money, which is the usual shape of a long loan and is spelled out in the interest-math guide.
If you change nothing, 300 payments remain at $1,896.20, and the interest still ahead is $288,028. The payoff stays on the original 30-year calendar. Typing the remaining balance, 6.5%, and 25 years into the calculator reproduces that payment. Entering $280,833 instead of $280,832.93 moves the payment by less than a cent at this rate.
A new 30-year loan at 5.75%
Re-amortize $280,832.93 over a fresh 30 years at 5.75%. The payment falls to $1,638.86. That is $257.34 less per month.
Cash break-even on the $4,500 fee uses only that difference. Seventeen lower payments add up to $4,374.78. The 18th lower payment brings the running total to $4,632.11, which is the first month the payment cut has covered the fee. Sell or refinance again before that payment, and the fee is not paid for by the savings.
Interest on the new loan is $309,158. That is $21,130 more than the $288,028 you would pay by keeping the old loan, because the same balance is spread over 360 months instead of 300. Add the $4,500 and the new loan costs about $25,630 more in total, even though every statement looks cheaper. The term also runs about five years longer.
A short cash break-even means the payment cut repaid the fee. It does not mean the refinance is the cheaper loan.
The same rate cut, kept on 25 years
Amortize the same $280,832.93 over the 300 months you had left, still at 5.75%. The payment is $1,766.74, which is $129.47 under the current payment. The fee takes longer to earn back: 34 payments cover $4,401.85, and the 35th reaches $4,531.31.
Remaining interest is $249,188. That is $38,840 less than staying at 6.5% for those 300 months. After the $4,500 fee, you pay about $34,340 less over the rest of the loan, and the payoff year does not move later.
Same rate. The term is what changes the interest. A lender who offers only the new 30-year payment is quoting the version that feels easier and costs more.
| Keep 6.5%, 25 years left | New 30 years at 5.75% | 25 years at 5.75% | |
|---|---|---|---|
| Payment | $1,896.20 | $1,638.86 | $1,766.74 |
| Months left | 300 | 360 | 300 |
| Interest still to pay | $288,028 | $309,158 | $249,188 |
| Cash months to cover $4,500 | — | 18 | 35 |
How to run your own fee
The page shows one loan at a time. For “keep the current loan,” enter the remaining balance, the rate on the note, and the years left. Write down the payment and the total interest. Then enter the new rate and the new term and subtract. Divide the closing costs by the monthly difference. That quotient is the cash break-even in months. Do the interest subtraction separately, because lengthening the term can add interest the monthly savings never mention.
Points, escrow, and a prepayment penalty are not in the chart. If the new loan rolls the fee into the balance, add the fee to the amount before you compare — you would then pay interest on the fee itself. The payoff-timeline guide works a different case: a $400,000 loan, five years in, refinanced over the years that were left. There the break-even is short because the term is not restarted. Read the term on the new note before you treat that example and this one as the same offer.
What this comparison leaves out
It ignores taxes, mortgage insurance, and whether you will actually stay through month 18 or month 35. It also ignores cash you need for something other than the fee. A lower required payment can be the point of the refinance even when total interest rises — if the old payment is the one you cannot make. That is a cash-flow reason, and it should be named as one. It is not the same claim as “this loan is cheaper.”