Refinance break-even calculator
A refinance costs money up front and saves money each month. Break-even is when the savings have paid back the costs.
How do you calculate a refinance break-even point?
A refinance break-even point is closing costs divided by monthly savings. Refinancing $350,000 from 7.25% (27 years left) to 6.25% on a 30-year loan drops the payment from $2,465/mo to $2,155/mo, saving $310/mo. With $6,000 in closing costs, it breaks even in 1 yr 8 mo.
Stay in the home past break-even and the refinance comes out ahead. Sell or refinance again before it, and you've paid more than you saved.
Refinance break-even
Pays for itself in 1 yr 8 mo. Strong case if you'll stay that long. Over the full life of both loans you'd pay $16,752 less in interest and costs, counting the new term.
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How break-even is calculated
Monthly savings is the difference between your current principal and interest payment and the new one. It's a simple measure: it doesn't account for the extra years of payments if you restart a 30-year term, or for the interest you'd pay over the life of each loan.
A deeper comparison
If you have 27 years left and refinance into 30, you'll make three extra years of payments. To compare fairly, either choose a new term close to your remaining term, or compare total interest over the time you expect to keep the loan.
What goes into closing costs
Lender fees, appraisal, title insurance, escrow and recording fees, and any discount points. Prepaid items like interest and escrow deposits for taxes and insurance aren't true costs of refinancing, since you'd pay them anyway, so leave them out of the break-even.
If refinancing doesn't pay
If your rate is already low and you need cash, a HELOC keeps your rate. HELOC vs. cash-out refinance.
Questions people ask
Does a longer new loan term count against a refinance?
Yes. Resetting to 30 years lowers the payment partly by stretching it out. The lifetime line under the result counts every year of both loans, so you can see that trade.
What's a good refinance break-even period?
Under 3 years is strong for most people. Past 5 years, only refinance if you're confident you'll stay.
Should I refinance if my mortgage rate is already low?
Usually not, if what you need is cash rather than a lower rate. A HELOC usually beats refinancing a low first mortgage, because it lets you keep that rate. Compare them.
Example
A homeowner owes $350,000 at 7.25% with 27 years left. A new 30-year loan at 6.25% drops the principal and interest payment by about $310 a month. With $6,000 in closing costs, break-even is about 20 months. If he expects to stay at least five years, the refinance pays off comfortably. If he might move within two years, it barely breaks even. Choosing a 25-year term at a similar rate would keep his payoff date on track while still lowering the payment, a good middle ground when the goal is to save without adding years.
Also asked
Should I pay points to lower my refinance rate?
Only if you'll keep the loan well past the break-even point. Points raise closing costs and lengthen the refinance break-even, so they pay off only over a long hold.
Does a refinance restart my mortgage?
Yes, unless you choose a shorter term. Picking a term close to your remaining years keeps you on track to pay off on time.
Is a no-closing-cost refinance a good idea?
Sometimes. A no-closing-cost refinance trades closing costs for a higher rate, so it can make sense if you might sell or refinance again soon.
Do I need an appraisal to refinance?
Usually, though some programs waive it, such as certain conventional refinances with an appraisal waiver and FHA or VA streamline refinances. An appraisal adds a few hundred dollars and a week or two; include its cost in your break-even math.