How to calculate the “break-even” point with a refinance

When you refinance there are costs associated with closing the loan. While you may be saving hundreds of dollars monthly, it is still good to know when you break even with your savings and the money spent on the refinance. 

To calculate the break-even point of a refinance:

  • Start by compiling all the costs to refinance:
    • Lender fees
    • Title Costs
    • Third Party Costs
    • Escrow charges
  • Calculate the monthly savings
  • Divide the costs by the monthly savings

But wait! There’s more to this calculation.

Interest saved is more than the payment savings. 

Let’s say that you are refinancing your home to save $200 per month and the closing costs associated with this are $2,000. 

When you divide $2,000 by $200, you come to a break-even point of 10 months, but payment savings are different than actual cost savings.

The interest saved is usually more than the payment savings.  In this example, the monthly savings is $200, but the interest savings could be $230.  The extra $30 is added to principal of your loan and reduces the mortgage balance more.  That means the break-even is really 9 months, not 10.