Mortgage Refinance Break-Even Calculator
Calculate exactly how many months it will take to recover your closing costs and start saving money.
What is a Mortgage Refinance Break-Even Point?
The mortgage refinance break-even point is the specific moment in time when the monthly savings from your new, lower interest rate mortgage finally equal the upfront costs you paid to get that loan (closing costs). Refinancing isn't free; it usually costs between 2% and 5% of the loan amount in appraisal fees, origination fees, and title insurance.
How to Calculate Your Break-Even Period
To find your break-even point manually, use this simple formula:
Total Closing Costs / Monthly Savings = Months to Break Even
For example, if you pay $4,000 in closing costs to save $200 a month on your mortgage payment, your break-even point is 20 months ($4,000 / $200 = 20). If you plan to stay in the home for at least 21 months, refinancing makes financial sense.
Factors to Consider Before Refinancing
- Interest Rate Differential: Most experts suggest refinancing only if you can drop your rate by at least 0.75% to 1%.
- Loan Term: If you move from a 30-year loan with 20 years left back into a new 30-year loan, you might pay more in total interest even with a lower rate.
- Private Mortgage Insurance (PMI): If your home value has increased, you might be able to eliminate PMI, which accelerates your break-even time.
- Tax Implications: Mortgage interest is often tax-deductible. A lower interest payment could slightly reduce your tax deduction.
Real-World Example
Imagine the Johnson family. They have a current mortgage payment of $2,100. By refinancing, they can lower that payment to $1,850, saving $250 per month. However, the lender is charging $6,000 in closing costs. Using our calculator:
$6,000 / $250 = 24 Months
If the Johnsons plan to move in 18 months for a job transfer, they would lose $1,500 by refinancing. If they plan to stay for 10 years, they will save $24,000 over the life of the loan after the break-even point.