Calculate Break Even Refinance

Refinancing your home mortgage can save you money, but it's important to understand when the savings will actually begin. The break-even point is the time when the cost of refinancing equals the savings from your new mortgage. This calculator helps you determine when your refinance will break even.

What is a break-even refinance?

A break-even refinance is when the total cost of refinancing your home mortgage equals the savings you'll realize from the new loan. Before this point, refinancing may not be cost-effective. After this point, refinancing becomes financially beneficial.

The break-even point is calculated by comparing the closing costs of refinancing with the interest savings over time. The formula typically considers:

Original loan balance
New loan interest rate
Closing costs of refinancing
Length of the loan term

Refinancing can also affect your monthly payments. While you might save on interest, you might pay more in principal if you extend your loan term.

How to calculate break-even refinance

The break-even point for a refinance can be calculated using the following formula:

Break-even months = (Closing costs) / (Monthly interest savings)

Where:

Closing costs are the fees you pay to refinance (appraisal, title insurance, etc.)
Monthly interest savings is the difference in interest payments between your current and new loan

For example, if you pay $3,000 in closing costs and save $100 per month in interest, your break-even point would be 30 months.

Example calculation

Let's say you have a $200,000 mortgage with a 5% interest rate. You're considering refinancing to a 4% rate with $3,000 in closing costs.

Calculate your current monthly payment: $200,000 × 0.05/12 = $833.33
Calculate your new monthly payment: $200,000 × 0.04/12 = $666.67
Calculate monthly interest savings: $833.33 - $666.67 = $166.66
Calculate break-even months: $3,000 / $166.66 ≈ 18 months

This means you'll need to stay in your home for at least 18 months to break even on the refinance.

Factors affecting break-even point

Several factors can affect when your refinance will break even:

Closing costs - Higher closing costs will increase your break-even period
Interest rate difference - A larger difference between your current and new rate will reduce your break-even period
Loan term - Extending your loan term may increase your break-even period
Property value - If your home appreciates, you may break even sooner

Always compare the total cost of refinancing, including closing costs and potential fees, to determine if refinancing is truly beneficial.

When to refinance

Refinancing makes sense when:

You can lock in a lower interest rate
Your break-even period is shorter than the time you plan to stay in the home
You can afford the closing costs
You want to change your loan term (e.g., from 30 to 15 years)

Consider refinancing if:

Your credit score has improved since your last mortgage
Interest rates have dropped significantly
You want to convert from an adjustable-rate to a fixed-rate mortgage
You need to access equity from your home

You should avoid refinancing if:

Your break-even period is longer than the time you plan to stay in the home
You can't afford the closing costs
You're not comfortable with the risk of a variable-rate mortgage

FAQ

How do I calculate the break-even point for refinancing?

Use the formula: Break-even months = (Closing costs) / (Monthly interest savings). You can use our calculator above to perform this calculation.

What are typical closing costs for refinancing?

Closing costs typically range from 2% to 5% of your loan amount, or $2,000 to $5,000 for a $200,000 mortgage. Common fees include appraisal, title insurance, and origination fees.

How long does it take to break even on a refinance?

The break-even period varies based on your closing costs and interest savings. It can range from 6 months to several years.

Can refinancing hurt my credit score?

Refinancing can temporarily lower your credit score as it's reported as a hard inquiry. However, it typically doesn't affect your long-term credit score.

Should I refinance if I plan to sell soon?

If you plan to sell within a year, refinancing may not be cost-effective. The savings from refinancing may be offset by the cost of selling the home.