Mortgage Refinance Break-Even Calculator
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Understanding Your Refinance Break-Even Point
Refinancing a mortgage can significantly lower your monthly expenses, but it is not free. Between appraisal fees, credit reports, and title insurance, closing costs typically range from 2% to 5% of the loan amount. To determine if a refinance is financially sound, you must calculate the Break-Even Point.
How This Calculator Works
The math behind refinancing is straightforward: we divide the total cost of obtaining the new loan by the amount of money you save each month. The result is the number of months you need to stay in the home before the savings actually begin to benefit your pocketbook.
- Monthly Savings: The difference between your old Principal & Interest payment and your new one.
- Closing Costs: The sum of all "out-of-pocket" or rolled-in fees for the new loan.
- The Milestone: If you plan to sell the home before the break-even month, the refinance might actually cost you money.
Example Calculation
Imagine your current payment is $1,800. You secure a new rate that drops your payment to $1,550, saving you $250 per month. If the closing costs are $5,000, the calculation is:
$5,000 (Costs) / $250 (Savings) = 20 Months
In this scenario, you must keep the loan for at least 1 year and 8 months to recover your initial investment.
When Should You Refinance?
Experts generally suggest refinancing if you can lower your interest rate by at least 0.75% to 1%. However, even a 0.5% drop can be worth it if you plan on staying in the property for a long duration (10+ years). Always consider how the new loan term (e.g., restarting a 30-year clock) impacts the total interest paid over the life of the loan.