When Does Refinancing a Loan Pay Off? A Break-Even Framework

A 1% rate drop sounds like an obvious win. But once you subtract prepayment penalties and setup fees, the real math can tip either way. Here's a one-line break-even formula plus three scenarios that show when refinancing is worth it.

1. Hidden Costs of Refinancing

• Prepayment penalty — 0.7–1.4% of outstanding balance (usually sliding to 0 over 3 years)
• Appraisal & mortgage-setup fees — for secured loans
• Stamp duty & legal fees — tiered by loan size

2. Break-Even Formula

Break-even months = Total switching cost ÷ (Old monthly interest − New monthly interest)

Use each loan's first-month interest for simplicity. If the break-even months are shorter than your remaining term, you come out ahead.

3. Three Scenarios

A) Mortgage 200M, 15 years remaining, 4.8% → 3.5%

• Prepayment penalty: 2.4M
• Other fees: ~0.6M → Total: 3.0M
• Monthly interest gap: ~217K
• Break-even: ~14 months out of 180 → clear win

B) Unsecured loan 30M, 2 years remaining, 6.2% → 5.3%

• Total switching cost: ~0.35M
• Monthly gap: ~22.5K
• Break-even: 15.5 months out of 24 → narrow win

C) Mortgage 150M, 3 years remaining, 4.2% → 3.6%

• Total switching cost: ~2.3M
• Monthly gap: ~75K
• Break-even: 31 months out of 36 → not worth it

4. Rule of Thumb

Break-even under two-thirds of remaining term = confident switch. Between 2/3 and full term = borderline. Beyond full term = skip.

5. Calculate Precisely

• Loan Repayment Calculator
• Interest Calculator
• Jeonse/Monthly Rent Conversion