Is Refinancing Worth It? How to Calculate Your Break-Even Point

By HSP · Published October 21, 2026 · 6 min read · Money & Finance

When rates drop, the ads start: "Lower your payment today!" A lower payment feels like a win, but refinancing is not free. You are paying off your old mortgage with a brand-new one, and that new loan comes with fees. The real question is simple: how long until the savings pay back the fees? That number is your break-even point, and once you know it, the decision usually becomes obvious.

Step 1: Add up what refinancing really costs

Start with the total cost of switching. In the U.S., refinancing means paying closing costs much like the ones you paid when you bought: lender origination fees, an appraisal, title services, a credit report, recording fees and sometimes attorney or survey fees. Freddie Mac says to expect roughly 3% to 6% of the loan principal, depending on your lender, credit score and location. On a $300,000 balance, that is $9,000 to $18,000. If the lender offers a lower rate in exchange for "points", add those too: one point equals 1% of the loan amount.

In Canada, the biggest cost is often not a fee but a prepayment penalty for breaking your mortgage before the term ends. There may also be appraisal, legal and discharge fees. More on penalties below.

Step 2: Work out your monthly savings fairly

Compare your current principal-and-interest payment with the new one. Leave out property tax and insurance, because they do not change when you refinance. Here is our first example:

• You owe $300,000 at 7.0% with 25 years left. Your payment is about $2,120.34 a month.
• A lender offers 6.0% over the same 25 years. The new payment is about $1,932.90.
• Monthly savings: $187.43.

You can check these numbers in the mortgage calculator, and our guide on how to calculate a mortgage payment explains the formula behind them.

Step 3: Divide costs by savings

The break-even formula is: break-even months = total refinance costs ÷ monthly savings. With $9,000 in costs (3% of the balance), that is $9,000 ÷ $187.43 = 48 months, or four years. If you expect to keep the loan for 10 years, you would keep about six years of savings after paying off the fees, which is roughly $13,500. The same idea applies to businesses working out when a new product pays for itself, which our break-even point guide covers.

Notice how much the size of the rate drop matters. Half a point lower doubles the wait compared with a full point, and with higher closing costs the break-even point can stretch past the time many people stay in a home.

The trap: resetting the clock to 30 years

The last row looks the best, but it hides a cost. Stretching 25 remaining years into a new 30-year loan lowers the payment mostly because you are paying for longer. Add it up: staying with the current loan costs about $636,100 in total payments. Refinancing to 6.0% over 25 years costs about $588,900 including the $9,000 in fees, a real saving of roughly $47,000. But refinancing to 6.0% over 30 years costs about $656,500, which is around $20,000 more than doing nothing, even though the monthly payment drops the most.

If you need a lower payment for breathing room, the longer term can still make sense. Just know what you are trading. A good compromise is to take the new rate but keep paying your old amount. The extra goes to principal, and our guide on how to amortize a loan shows how fast that shrinks the balance.

In Canada: check the prepayment penalty first

In Canada, switching to a lower rate before your term ends usually means breaking a closed mortgage, and that triggers a penalty. The Financial Consumer Agency of Canada (FCAC) says the penalty is usually the higher of three months' interest or the interest rate differential (IRD), and the IRD usually applies when your rate is higher than today's rate and you signed less than five years ago. In FCAC's own example, a $200,000 balance at 6% with 36 months left, when the lender's comparable posted rate is 4%, gives three months' interest of $3,000 but an IRD of $12,000, so the penalty is $12,000.

That penalty goes into Step 1 as a cost, just like closing costs. Before deciding, ask your lender for a payout statement with the exact penalty, use any yearly prepayment privileges first (the penalty is then based on a lower balance), and compare the result with simply waiting until your term ends and shopping around at renewal. Our guide to fixed vs variable rate loans may help if you are choosing what to switch into. One more detail: many Canadian fixed-rate mortgages compound interest semi-annually, so a lender's payment figure may differ by a few dollars from a monthly-compounding calculator.

Other reasons the answer can change

• How long you will really stay. Be honest. A job move or a growing family can cut a ten-year plan to three.
• "No-closing-cost" offers. The fees are usually built into a higher rate or the loan balance, so compare the APR, not just the rate. Our guide on APR vs interest rate explains the difference.
• Cash-out refinancing. Borrowing more against your home changes the maths completely, because you are taking on new debt.
• Rolling the costs into the loan. You pay interest on the fees for years, which pushes the real break-even point later.

A quick checklist before you sign

1. Get a written estimate of every cost (or the exact penalty in Canada).
2. Compare principal-and-interest payments only.
3. Divide costs by monthly savings to get the break-even month.
4. Compare total remaining payments, not just monthly ones, especially if the term changes.
5. Ask yourself whether you will keep the loan well past break-even.

Put your own numbers into the refinance calculator: it shows the new payment, the monthly difference and the break-even months in one go. Try a few rates and terms to see how sensitive the answer is.

VSH take: a lower monthly payment is not the same as saving money. The two numbers that matter are the break-even month and the total you will pay over the life of the loan. If both look good and you plan to stay, refinancing is usually a smart move. If either one is shaky, waiting often costs you nothing.

This guide is general education, not financial advice. Rates, fees and penalties vary by lender and country; confirm the figures with your lender or a licensed adviser before you decide.