Category: Mortgage Refinancing
Resource type: Calculator
What This Calculator Answers
How many months will it take for your monthly savings from a refinance to pay back what the refinance cost you? Until you pass that point, you are in the red. After it, every month of savings is real money in your pocket.
The Formula
Step 1: Monthly savings
Monthly Savings = Current Monthly P&I Payment − New Monthly P&I Payment
(P&I is principal and interest only. Leave out taxes and insurance, since those don't change with a refinance.)
Step 2: Total refinance cost
Total Cost = Lender fees + Third-party fees + Prepaid items you can't recover
Typical items include origination fees, appraisal, title and settlement fees, recording fees, and any prepayment penalty on the old loan.
Step 3: Break-even point
Break-Even (months) = Total Refinance Cost ÷ Monthly Savings
Monthly payment formula (for Steps 1 and 2)
M = P × [r(1 + r)^n] ÷ [(1 + r)^n − 1]
- P = loan balance
- r = monthly interest rate (annual rate ÷ 12)
- n = total number of monthly payments
Worked Example
The scenario
| Item | Current Loan | New Loan |
|---|---|---|
| Balance | $280,000 | $280,000 |
| Interest rate | 7.00% | 6.00% |
| Term | 30 years | 30 years |
| Closing costs | n/a | $6,000 |
For simplicity, this example assumes the current loan is on a fresh 30-year schedule. The adjustments section below covers loans that are further along.
Step 1: Calculate both payments
Current payment (7.00%)
- r = 0.07 ÷ 12 = 0.005833
- n = 360
- M ≈ $1,862.84
New payment (6.00%)
- r = 0.06 ÷ 12 = 0.005
- n = 360
- M ≈ $1,678.74
Step 2: Monthly savings
$1,862.84 − $1,678.74 = $184.10 per month
Step 3: Break-even
$6,000 ÷ $184.10 = about 32.6 months, or roughly 33 months (2 years, 9 months)
How to Read the Result
If you stay 5 years (60 months)
- Savings: 60 × $184.10 = $11,046
- Minus costs: $11,046 − $6,000 = +$5,046 net gain
If you sell in 2 years (24 months)
- Savings: 24 × $184.10 = $4,418
- Minus costs: $4,418 − $6,000 = −$1,582 net loss
The takeaway: The same refinance is a good deal or a bad deal depending on how long you keep the loan. Compare the break-even figure with your honest estimate of how long you'll stay in the home.
Adjustments That Change the Answer
1. Rolling closing costs into the loan
If you add the $6,000 to your balance, your new payment rises and your monthly savings shrink. You also pay interest on the fees. Recalculate using the larger balance ($286,000 in this example).
2. Resetting the clock
If you are 8 years into a 30-year loan and refinance into a new 30-year loan, your payment drops partly because you stretched the term. Monthly savings can look great while total interest paid over the life of the loan goes up. Compare against a new term that matches your remaining years (e.g., a 22-year or 20-year loan) for an honest comparison.
3. "No-closing-cost" refinances
The costs don't vanish. They are usually traded for a higher interest rate or built into the balance. Run the calculator with the higher rate and treat the cost as $0 to see the true savings.
4. Cash-out refinances
If you borrow extra cash, the new payment reflects the larger balance. Compare only the rate and term effects, not the payment alone.
Quick Decision Guide
| Break-even point | What it generally suggests |
|---|---|
| Under 24 months | Strong case, if you're staying put |
| 24 to 48 months | Reasonable if you're confident you'll stay |
| Over 48 months | Marginal, and any plan to move or refinance again could erase the gain |
These are rules of thumb, not guarantees. Lending Logic Lab provides educational information, not personalized financial advice, so consider confirming figures with your lender or a qualified advisor.
Reader Checklist Before You Run the Numbers
- Get a Loan Estimate from at least three lenders
- Ask for the total itemized closing costs, not just the rate
- Confirm whether your current loan has a prepayment penalty
- Decide how many years you realistically expect to keep the home
- Recalculate with the same remaining term to compare fairly
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