Refinancing your mortgage can save you thousands — or it can cost you money if you do not run the numbers. This guide walks you through the complete break-even calculation so you can make an informed decision.
The break-even formula
Break-Even Month = Total Refinance Costs ÷ Monthly Savings
If you plan to keep the new mortgage longer than the break-even period, refinancing saves you money. If you might sell or refinance again before the break-even month, it does not make sense.
Step 1: Calculate your penalty
Variable rate penalty (simple)
Variable rate mortgages always use the 3-month interest penalty:
Penalty = Remaining Balance × Current Rate ÷ 12 × 3
| Remaining Balance | Current Rate | 3-Month Interest Penalty |
|---|---|---|
| $350,000 | 5.25% | $4,594 |
| $400,000 | 5.25% | $5,250 |
| $450,000 | 5.25% | $5,906 |
| $500,000 | 5.25% | $6,563 |
Fixed rate penalty (depends on lender type)
Fixed rate penalties are the higher of 3-month interest OR the Interest Rate Differential (IRD).
Monoline lender (fair IRD):
| Your Rate | Current Rate for Remaining Term | Differential | Balance | Years Left | IRD Penalty |
|---|---|---|---|---|---|
| 5.29% | 4.89% (2-year rate) | 0.40% | $400,000 | 2 | $3,200 |
| 5.29% | 4.89% (3-year rate) | 0.40% | $400,000 | 3 | $4,800 |
| 5.49% | 4.89% | 0.60% | $400,000 | 2 | $4,800 |
| 5.49% | 4.89% | 0.60% | $400,000 | 3 | $7,200 |
Big Five bank (posted-rate IRD):
| Your Rate | Bank Posted Rate for Remaining Term | Differential | Balance | Years Left | IRD Penalty |
|---|---|---|---|---|---|
| 5.29% | 3.44% (2-year posted) | 1.85% | $400,000 | 2 | $14,800 |
| 5.29% | 3.44% (3-year posted) | 1.85% | $400,000 | 3 | $22,200 |
| 5.49% | 3.44% | 2.05% | $400,000 | 2 | $16,400 |
| 5.49% | 3.44% | 2.05% | $400,000 | 3 | $24,600 |
The difference is massive. The same borrower breaking the same mortgage pays $3,200–$7,200 at a monoline lender vs $14,800–$24,600 at a Big Five bank.
Step 2: Add up all refinancing costs
| Cost | Typical Range |
|---|---|
| Mortgage penalty | $3,000–$25,000 (see above) |
| Legal fees | $800–$1,500 |
| Appraisal fee | $0–$500 (often waived) |
| Discharge fee (old lender) | $200–$350 |
| Title insurance | $200–$400 |
| Registration fees | $50–$200 |
| Total costs | $4,250–$27,950 |
Step 3: Calculate your monthly savings
Monthly Savings = Old Monthly Payment – New Monthly Payment
| Scenario | Old Rate | New Rate | Balance | Old Payment | New Payment | Monthly Savings |
|---|---|---|---|---|---|---|
| Small rate drop | 5.49% | 4.89% | $400,000 | $2,437 | $2,290 | $147 |
| Medium rate drop | 5.89% | 4.89% | $400,000 | $2,537 | $2,290 | $247 |
| Large rate drop | 6.49% | 4.89% | $400,000 | $2,691 | $2,290 | $401 |
| Very large drop | 7.49% | 4.89% | $400,000 | $2,955 | $2,290 | $665 |
Assumes 25-year amortization remaining.
Step 4: Calculate your break-even month
Scenario A: Variable to fixed (monoline)
| Detail | Amount |
|---|---|
| Current rate (variable) | 5.50% |
| New rate (5-year fixed) | 4.59% |
| Remaining balance | $400,000 |
| Monthly savings | $207 |
| Penalty (3-month interest) | $5,500 |
| Legal + appraisal + fees | $1,800 |
| Total cost | $7,300 |
| Break-even month | $7,300 ÷ $207 = 35 months (2 years, 11 months) |
Verdict: If you plan to keep this mortgage for at least 3 years, refinancing saves you money. Over the full 5-year term: $207 × 60 months = $12,420 in savings, minus $7,300 in costs = net savings of $5,120.
Scenario B: Fixed to fixed (monoline, 3 years remaining)
| Detail | Amount |
|---|---|
| Current rate (fixed) | 5.49% |
| New rate (5-year fixed) | 4.59% |
| Remaining balance | $400,000 |
| Monthly savings | $204 |
| Penalty (fair IRD, 3 years) | $7,200 |
| Legal + fees | $1,800 |
| Total cost | $9,000 |
| Break-even month | $9,000 ÷ $204 = 44 months (3 years, 8 months) |
Verdict: You break even in 44 months, and the new term is 60 months. Net savings over 5 years: $204 × 60 = $12,240 – $9,000 = $3,240. Worth it, but the savings are modest.
Scenario C: Fixed to fixed (Big Five bank, 3 years remaining)
| Detail | Amount |
|---|---|
| Current rate (fixed) | 5.49% |
| New rate (5-year fixed) | 4.59% |
| Remaining balance | $400,000 |
| Monthly savings | $204 |
| Penalty (posted-rate IRD, 3 years) | $24,600 |
| Legal + fees | $1,800 |
| Total cost | $26,400 |
| Break-even month | $26,400 ÷ $204 = 129 months (10 years, 9 months) |
Verdict: You would never break even within a single 5-year term. Do not refinance. The bank’s penalty calculation makes it financially impossible to benefit. Wait until your term ends and switch to a monoline at renewal.
Scenario D: B-lender to A-lender (at renewal)
| Detail | Amount |
|---|---|
| Current rate (B-lender) | 7.29% |
| New rate (A-lender fixed) | 4.89% |
| Remaining balance | $380,000 |
| Monthly savings | $548 |
| Penalty | $0 (at renewal — no penalty) |
| Legal + fees | $1,500 |
| Total cost | $1,500 |
| Break-even month | $1,500 ÷ $548 = 3 months |
Verdict: This is the best time to switch — at renewal. You break even in less than 3 months and save $548/month for the next 5 years = $32,880 in savings.
When refinancing is almost always worth it
| Situation | Why |
|---|---|
| At renewal (no penalty) | Zero penalty — you only pay legal fees ($1,000–$1,500). Almost always worth switching to a better rate. |
| Variable rate mortgage | 3-month interest penalty is low. Even small rate improvements can break even quickly. |
| Monoline lender fixed rate | Fair IRD penalty is reasonable. Medium-to-large rate drops break even within 2–3 years. |
| B-lender moving to A-lender | Rate difference of 2%+ means huge monthly savings that quickly overcome any costs. |
| Consolidating high-interest debt | If you are paying 20% on credit cards, even with a $10,000 penalty, consolidating into a 5% mortgage saves dramatically. |
When refinancing is almost never worth it
| Situation | Why |
|---|---|
| Big Five bank fixed, 3+ years remaining | Posted-rate IRD penalty is so high that savings rarely exceed costs. Wait for renewal. |
| Small rate improvement (< 0.40%) | Monthly savings are too small to overcome penalty and fees in a reasonable timeframe. |
| You plan to sell within 2 years | Not enough time to recoup costs through monthly savings. |
| Your mortgage balance is small (< $200K) | Monthly savings are proportionally smaller, making break-even harder to achieve. |
Alternative: blend and extend
Some lenders offer a “blend and extend” option where they blend your current rate with a new rate for an extended term — avoiding the penalty entirely. This is not always the best deal:
| Approach | How It Works | Best When |
|---|---|---|
| Break and refinance | Pay penalty, get entirely new mortgage at market rate | Rate drop is large enough to overcome penalty |
| Blend and extend | Lender averages your current rate with new rate for a longer term | You want to avoid penalty and the blended rate is acceptable |
| Wait for renewal | Switch at end of term with zero penalty | Penalty is too high and you can wait |
Example blend and extend:
- Current rate: 5.49% (2 years remaining)
- Market rate: 4.59% (5-year)
- Blended rate: approximately 4.85% for 5 new years
- You avoid the penalty but pay 0.26% more than market rate for 5 years
The blended rate saves money compared to keeping your current rate for 2 more years and then getting market rate — but you do not get the full benefit of today’s lower rates.
Refinance decision checklist
Before refinancing, answer these questions:
- What is my exact penalty? Call your lender and get the number in writing
- What rate can I get today? Get quotes from a broker for your refinance
- What are the total costs? Penalty + legal + appraisal + discharge + registration
- What are my monthly savings? Compare old vs new payment
- When is my break-even month? Total costs ÷ monthly savings
- Will I keep this mortgage past break-even? If not, do not refinance
- Is there a blend-and-extend option? Compare total cost to breaking and refinancing
- Am I near renewal? If less than 12 months away, it may be worth waiting