Mortgage Refinance Savings Calculator
Calculate your monthly savings and see how long it takes to break even on your refinance costs.
How Does a Mortgage Refinance Save You Money?
Refinancing involves replacing your current mortgage with a new loan, typically to secure a lower interest rate or change the loan term. By lowering your interest rate, you reduce the cost of borrowing, which directly lowers your monthly principal and interest (P&I) payment.
Understanding the Break-Even Point
While a lower monthly payment is attractive, refinancing isn't free. You will encounter closing costs, which usually range from 2% to 5% of the loan amount. The Break-Even Point is the number of months it takes for your monthly savings to "pay back" those closing costs. If you plan to move before hitting your break-even point, refinancing might actually cost you money.
Example Calculation
Suppose you have a $300,000 balance at a 6.5% interest rate. Your current monthly payment is roughly $1,896. If you refinance into a new 30-year loan at 4.5%, your new payment would be approximately $1,520.
- Monthly Savings: $376
- Closing Costs: $5,000
- Break-Even Point: $5,000 / $376 = 13.3 months
In this scenario, after 14 months, the refinance has paid for itself, and every month thereafter is pure profit.
When Should You Consider Refinancing?
Most experts suggest that if you can lower your interest rate by at least 0.75% to 1%, refinancing is worth investigating. However, you should also consider:
- Loan Duration: If you restart a 30-year clock after already paying 10 years on your old loan, you might pay more in total interest even with a lower rate.
- Equity: Having at least 20% equity can help you avoid Private Mortgage Insurance (PMI) on the new loan.
- Credit Score: A higher credit score since you took out your original loan may qualify you for significantly better rates.