A rate-and-term refinance changes your mortgage interest rate, loan duration, or loan program without pulling out cash. Evaluating its profitability requires strict break-even horizon calculations.
1. The Break-Even Formula
Break-Even Formula
$$\text{Break-Even Period (Months)} = \frac{\text{Total Non-Recurring Closing Costs (\$)}}{\text{Monthly Principal & Interest Savings (\$)}}$$ If you plan to remain in your home beyond the break-even point, the refinance generates net positive wealth.
| Loan Structure | Monthly Payment ($400k Loan) | Total Interest Paid (Life of Loan) | Principal Paid at Year 5 |
|---|---|---|---|
| 30-Year Fixed at 7.00% | $2,661 / month | $558,036 | $23,124 |
| 30-Year Fixed at 5.75% | $2,334 / month ($327 savings) | $440,311 | $28,842 |
| 15-Year Fixed at 5.25% | $3,217 / month (+$556 increase) | $179,060 ($378k saved) | $100,542 (Rapid Equity) |