Break-Even Point

Break-even analysis weighs an upfront cost against the stream of benefits it produces over time, and finds the moment the two cancel out. After that point, you are ahead; before it, you have not yet recovered what you spent.

In a refinance, the upfront cost is the closing costs and the benefit is the reduction in your monthly payment. Dividing the closing costs by the monthly saving gives the number of months to break even. If you expect to keep the home and the loan past that point, the refinance tends to pay off; if you might sell or refinance again sooner, it may not. The same logic applies to a rent-versus-buy decision, where the upfront costs of buying take a number of years of ownership to recover, which is why a short expected stay often favors renting.