Refinance Break-Even Calculator: Months to Recoup Costs
Is refinancing worth the closing costs? Enter your current loan and the new offer to see the monthly saving, the break-even month and the interest on each path. For a rate buy-down on a new purchase use the mortgage points calculator.
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Formula
- Payment =
balance x r / (1 - (1 + r)^-n), whereris the annual rate / 12 andnis the number of monthly payments. - Monthly saving = current payment - new payment.
- Break-even months =
ceil(closing costs / monthly saving). - Interest left = payment x months - balance, for each loan. Net saving = interest if you keep - interest on the new loan - closing costs.
Worked example
Balance 200,000 at 7% with 25 years left: payment 1,413.56. Refinance to 5.5% over 25 years: payment 1,228.17, a saving of 185.39 a month. With 4,000 in closing costs, 4,000 / 185.39 = 21.6, so break-even is 22 months.
Interest left on the old loan is 1,413.56 x 300 - 200,000 = 224,068.00. On the new loan it is 1,228.17 x 300 - 200,000 = 168,451.00. After the 4,000 costs, you keep 51,617.00 of interest.
When to use it
Use this page to replace an existing loan. If you are choosing between paying points and a higher rate on a new purchase, use the mortgage points calculator. If the aim is only to pay the loan off sooner without new costs, the extra mortgage payment calculator may be cheaper.
Second example
Balance 300,000, current rate 6.5% over 30 years, new rate 6% over 30 years, costs 5,000: payments 1,896.20 and 1,798.65, saving 97.55 a month. Break-even is 52 months.
Common mistakes
- Judging by the lower payment alone when the new term is longer.
- Rolling costs into the loan and forgetting they accrue interest; here they are paid in cash.
- Selling or refinancing again before break-even.
Assumptions
- Both loans are fixed rate and monthly payments are rounded to cents.
- Closing costs are paid in cash, not rolled into the balance.
- Taxes, insurance and escrow are not included.
Frequently asked questions
How is the refinance break-even point calculated?
Divide the closing costs by the monthly payment saving and round up. With 4,000 in costs and a saving of 185.39 a month, 4,000 / 185.39 = 21.6, so you break even in month 22.
Should I compare total interest as well as the payment?
Yes. Restarting a 25 year balance on a new 30 year term can lower the payment while adding years of interest. The interest lines compare the cost of keeping the old loan with the new one plus its closing costs.
What if the refinance raises my payment?
A lower rate on a shorter term often raises the monthly payment. The break-even shows 0 with the result "no monthly saving" because there is no saving to repay costs, and the interest comparison tells you whether the shorter loan is cheaper overall. A higher rate gives a negative monthly saving the same way, so the refinance does not pay back through the payment.
Do I need to stay in the home until break-even?
Yes, a refinance only pays off if you keep the loan at least as long as the break-even months. If you may sell or refinance again sooner, the costs may never be recovered. Closing costs here are assumed paid in cash, not added to the loan.
Is it worth refinancing for a 0.5 point lower rate?
It can be, if you stay long enough. On 300,000 at 6.5% refinanced to 6% over 30 years, the payment falls from 1,896.20 to 1,798.65, saving 97.55 a month. With 5,000 of costs you break even in month 52, about 4.3 years.
What happens when I refinance a 30-year loan into a 15-year loan?
The payment usually rises, but total interest drops. Moving 300,000 from 6.5% over 30 years to 5.5% over 15 years raises the payment from 1,896.20 to 2,451.25, yet cuts interest from 382,632 to 141,225, a net 236,407 after 5,000 of costs.
How do I calculate refinance break-even in Excel?
Divide costs by the monthly saving: =closing costs/(old payment-new payment), rounded up. Payments come from =PMT(rate/12, months, -balance). With 5,000 of costs and a 97.55 saving, =5000/97.55 is 51.3, so month 52.