Mortgage Refinance Savings Calculator
Calculate your monthly savings and determine your break-even point.
Should You Refinance Your Mortgage?
Refinancing a mortgage involves replacing your current home loan with a new one, typically to take advantage of lower interest rates or to change the loan term. While a lower monthly payment is the most common goal, it is vital to calculate the break-even point—the moment when your monthly savings finally offset the closing costs of the new loan.
Understanding the Calculation
To determine if refinancing makes sense, we use the standard amortization formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
- P = Principal loan amount
- i = Monthly interest rate (annual rate divided by 12)
- n = Total number of months (years multiplied by 12)
Example Scenario
Imagine you have a $300,000 balance at a 6.5% interest rate. Your current monthly principal and interest payment is approximately $1,896. If you refinance into a new 30-year loan at 5.0%, your new payment would be $1,610.
In this scenario, you save $286 per month. If the closing costs for the refinance are $5,000, you would divide $5,000 by $286 to find that your break-even point is roughly 17.5 months. If you plan to stay in the home longer than 18 months, refinancing is likely a smart financial move.
Key Factors to Consider
1. Closing Costs: Usually ranging from 2% to 5% of the loan amount, these include appraisal fees, title insurance, and origination fees.
2. Loan Term: Resetting a 30-year mortgage after you've already paid 5 years on your current one might lower your monthly payment but increase the total interest paid over time. Consider a 15-year or 20-year term to build equity faster.
3. Equity: Most lenders require at least 20% equity to avoid Private Mortgage Insurance (PMI), which can eat into your refinance savings.