Refinance Break Even Calculator
Calculate the break-even point for a mortgage refinance to determine how long it will take for the savings to cover the closing costs.
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Understanding Your Refinance Break-Even Point
Refinancing a loan, especially a mortgage, can be a powerful financial move to lower your monthly payments or interest rate. However, it's not free. Refinancing comes with closing costs, which can include appraisal fees, application fees, title insurance, and other charges. The refinance break-even point is the moment when the money you've saved from your lower monthly payments equals the total cost you paid to refinance.
The Refinance Break-Even Formula
Calculating your break-even point is straightforward. The formula is:
Break-Even Point (in months) = Total Refinancing Costs / Monthly SavingsWhere:
- Total Refinancing Costs: The sum of all fees and charges you pay to close the new loan.
- Monthly Savings: The difference between your old monthly payment and your new, lower monthly payment (Old Payment - New Payment).
Practical Example
Let's walk through an example to see how this works in practice.
- Current Monthly Mortgage Payment: $1,500
- New Monthly Payment After Refinancing: $1,300
- Total Closing Costs for the New Loan: $3,000
- Calculate Monthly Savings:
$1,500 (Old Payment) - $1,300 (New Payment) = $200 per month
- Calculate Break-Even Point:
$3,000 (Closing Costs) / $200 (Monthly Savings) = 15 months
In this scenario, it would take 15 months to recoup the closing costs. After those 15 months, the $200 saved each month becomes actual savings in your pocket.
Is Refinancing Right for You?
The break-even point is a crucial factor in deciding whether to refinance. The key question is: How long do you plan to stay in the home after refinancing?
If your break-even point is 15 months, but you plan to sell your home in a year, refinancing would result in a net loss. However, if you plan to stay in the home for five more years, you would have a significant period of real savings after the break-even point, making refinancing a smart decision.
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