Determine your break-even point on a mortgage refinance: how many months of savings to recoup your closing costs.
Break-even point
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Current monthly P+I
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New monthly P+I
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Monthly savings
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Lifetime interest savings
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Worked example
Imagine you still owe $320,000 with 25 years left at 7%, and you can refinance into a fresh 25-year loan at 5.5% with $6,000 in closing costs. Your current payment of principal and interest is about $2,261.69 a month. The new loan drops that to about $1,965.08, a monthly saving of roughly $296.61. To recover the $6,000 you spend to refinance, divide $6,000 by $296.61, which is about 21 months, so you break even in under two years. Because you keep the new loan for 25 years, the total interest falls from about $358,508 to about $269,524. After subtracting the $6,000 of closing costs, the lifetime saving is roughly $82,984. The break-even is the number that decides the call: if you expect to sell or refinance again before month 21, the deal loses money, but if you plan to stay put, the long-run saving is large.
| Item | Current | Refinanced |
|---|---|---|
| Rate | 7.0% | 5.5% |
| Monthly P&I | $2,261.69 | $1,965.08 |
| Total interest | $358,508 | $269,524 |
| Monthly savings | $296.61 | |
| Break-even (with $6,000 costs) | about 21 months | |
| Lifetime savings | about $82,984 | |
How it is calculated
The tool prices both loans with the standard fixed-rate mortgage formula, which sets a level monthly payment so the balance reaches zero at the end of the term. It computes the monthly payment on your current balance at your current rate and remaining term, then does the same for the proposed rate and term. The difference between the two payments is your monthly saving. Break-even is closing costs divided by that monthly saving, rounded up to a whole month, because you only recoup the cost once you have banked enough monthly savings to cover it. Lifetime savings compares the total interest paid over each full term and then subtracts the closing costs you paid to get the lower rate. One trap the math exposes: if you refinance a loan with 25 years left back into a new 30-year loan, you lower the payment but stretch the debt and can pay more interest overall, so matching the remaining term keeps the comparison honest.