Use the **Refinance Break-Even Calculator** to determine exactly how long it will take for the monthly savings from your new loan to cover the associated closing costs. This is the single most important metric cited on r/personalfinance and r/financialindependence when discussing mortgage refinancing.
Refinance Break-Even Calculator Reddit
Months to Break Even
This is the time in months it takes to recover your closing costs.
Refinance Break-Even Formula
- $$\text{T}_{\text{break}}$$ is the Time to Break Even (in months).
- $$\text{C}$$ is the Total Closing Costs.
- $$\text{M}_{\text{orig}}$$ is the Original Monthly Payment.
- $$\text{M}_{\text{new}}$$ is the New Monthly Payment.
Formula Sources: CFPB Guide to Refinancing, NerdWallet Refinance Breakeven
Variables Explained
- Current Monthly Payment ($\text{M}_{\text{orig}}$): Your current P&I (Principal and Interest) payment. It is crucial to exclude escrow payments (taxes and insurance) since they typically remain the same.
- New Monthly Payment ($\text{M}_{\text{new}}$): The anticipated P&I payment for the proposed new loan. Again, exclude future escrow payments.
- Total Closing Costs ($\text{C}$): The sum of all fees associated with securing the new loan, including appraisal fees, title insurance, and origination charges.
Related Financial Calculators
- Mortgage Payment Calculator
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What is the Refinance Break-Even Point?
The refinance break-even point is the moment in time when the cumulative savings from your lower monthly mortgage payment equal the total closing costs you paid to acquire the new loan. Mathematically, this is the number of months required for the net benefit to become zero.
Understanding this number is critical for making a smart financial decision. If you plan to sell your home before reaching the break-even point, refinancing will likely be a net negative financial move. Conversely, if you plan to stay in the home for significantly longer than the break-even period, refinancing can provide substantial long-term savings.
How to Calculate Refinance Break-Even (Example)
- Determine Monthly Savings: Subtract the New Monthly Payment from the Current Monthly Payment. (Example: $2,500 – $2,000 = $500 monthly savings.)
- Identify Total Closing Costs: Gather all the fees and costs from your Loan Estimate document. (Example: Total Closing Costs = $6,000.)
- Calculate Break-Even Time: Divide the Total Closing Costs by the Monthly Savings. (Example: $6,000 / $500 = 12 months.)
- Evaluate the Result: In this example, it will take 12 months for the refinance to pay for itself. If you plan to stay in the house for 5 years (60 months), the refinance is financially worthwhile.
Frequently Asked Questions (FAQ)
What costs should I include in the Closing Costs variable?
Include all non-recurring costs, such as loan origination fees, appraisal fees, title insurance, and points paid. Exclude recurring costs like prepaid interest, taxes, or insurance, as these are typically part of both loans.
What if my Monthly Savings is zero or negative?
If the new monthly payment is equal to or greater than the original, the break-even point is infinite. The calculator will alert you that refinancing will not provide P&I savings and may be a poor financial choice, unless your goal is to shorten the term.
Is the P&I payment the same as the total monthly payment?
No. Your total monthly payment often includes Principal, Interest, Taxes, and Insurance (PITI). For this calculator, you must only use the Principal and Interest (P&I) portions, as taxes and insurance (the T&I part) are usually similar for both loans.
Does a lower interest rate guarantee a lower monthly payment?
Not necessarily. While a lower rate usually helps, if you drastically shorten the loan term (e.g., refinancing a 30-year loan to a new 15-year loan), the monthly payment could still increase due to the accelerated principal repayment schedule.