Refinance Mortgage Break Even Calculator

Refinancing your mortgage can save you money, but it's important to know when the savings will outweigh the costs. Our refinance mortgage break even calculator helps you determine the exact point at which refinancing becomes financially beneficial.

What is a Refinance Break Even Point?

The refinance break even point is the number of months it takes for the savings from refinancing to equal the costs of refinancing. This includes closing costs, points, and any other fees associated with the new mortgage.

Understanding your break even point helps you decide whether refinancing is worth it in the short term. If your break even point is longer than the expected life of your mortgage, refinancing might not be the best financial decision.

How to Calculate Refinance Break Even

To calculate the refinance break even point, you need to know:

The current mortgage balance
The current interest rate
The new interest rate
The closing costs of refinancing
The points paid (if any)

The formula for calculating the break even point is:

Break Even Point (months) = Closing Costs / (Monthly Savings) Monthly Savings = (Current Monthly Payment - New Monthly Payment)

Where:

Closing Costs = Total fees associated with refinancing
Current Monthly Payment = Payment on your current mortgage
New Monthly Payment = Payment on the new mortgage

Factors Affecting Break Even

Several factors can affect your refinance break even point:

Interest Rate Difference: A larger difference between your current and new interest rate will result in greater monthly savings.
Closing Costs: Higher closing costs will increase your break even point.
Loan Term: Shorter loan terms generally result in higher monthly payments but lower total interest paid.
Current Mortgage Balance: A higher balance means more interest is paid over time, potentially making refinancing more beneficial.

Note: Refinancing may not always be the best financial decision. Consider factors like your financial goals, the stability of interest rates, and the potential for future rate changes.

Example Calculation

Let's say you have a $200,000 mortgage with a 5% interest rate. Your current monthly payment is $1,160. You're considering refinancing to a 4% interest rate with $3,000 in closing costs.

First, calculate your new monthly payment:

New Monthly Payment = P * (r(1+r)^n)/((1+r)^n - 1) Where: P = $200,000 r = 4%/12 = 0.003333 n = 360 (30 years) New Monthly Payment ≈ $995.83

Next, calculate your monthly savings:

Monthly Savings = $1,160 - $995.83 = $164.17

Finally, calculate your break even point:

Break Even Point = $3,000 / $164.17 ≈ 18.28 months

This means it will take about 18 months for the savings from refinancing to cover the closing costs.

Frequently Asked Questions

What is a good break even point for refinancing?

A good break even point depends on your financial situation. If your break even point is less than 12 months, refinancing is likely worth it. If it's more than 24 months, you may want to reconsider.

Do I need to pay closing costs upfront?

Yes, closing costs are typically paid upfront when refinancing. These costs include appraisal fees, title insurance, and other fees associated with the new mortgage.

Can I refinance if I have a good credit score?

Yes, having a good credit score can help you qualify for better interest rates and lower closing costs when refinancing. However, your credit score is just one factor considered by lenders.

What happens if interest rates rise after refinancing?

If interest rates rise after refinancing, you may be able to refinance again to take advantage of lower rates. However, this will incur additional closing costs and may not always be beneficial.