Mortgage Refinance Savings Calculator
Determine if refinancing your mortgage will save you money in the long run.
Should You Refinance Your Mortgage?
Refinancing a mortgage can be a powerful financial move, but it is not always the right choice for every homeowner. The primary goal of refinancing is typically to lower your monthly payment, reduce your interest rate, or change the length of your loan term. However, because refinancing involves closing costs (often ranging from 2% to 5% of the loan amount), you must ensure that the long-term savings outweigh the upfront expense.
Understanding the Break-Even Point
The "Break-Even Point" is the most critical metric in this calculator. It tells you exactly how many months it will take for your monthly savings to cover the cost of the refinance. For example, if your refinance costs $5,000 and you save $200 per month, your break-even point is 25 months. If you plan to sell your home or move before those 25 months are up, refinancing might actually cost you money rather than saving it.
A Realistic Example
Imagine you have a current loan balance of $300,000 at a 7% interest rate with 30 years (360 months) remaining. Your current principal and interest payment is approximately $1,996. If you refinance into a new 30-year loan at 5.5%, your new payment would be $1,703. This results in a monthly saving of $293.
If the closing costs for this refinance are $6,000, you would divide $6,000 by $293 to find your break-even point: 20.5 months. In this scenario, as long as you stay in the home for more than 2 years, the refinance is financially beneficial.
Key Factors to Consider
- Current Interest Rates: Generally, experts suggest refinancing if you can drop your rate by at least 0.75% to 1%.
- Loan Term: If you refinance from a 30-year to a 15-year mortgage, your monthly payment might increase, but you will save tens of thousands in interest over the life of the loan.
- Equity: Lenders typically require you to have at least 20% equity in your home to avoid Private Mortgage Insurance (PMI) on the new loan.
- Credit Score: Your ability to secure the lowest possible "New Interest Rate" depends heavily on your current credit score.