Refinance Break-Even

Enter your current total monthly mortgage payment, the new proposed monthly payment the lender is offering, and the total estimated closing costs (loan origination fees, appraisal, title search, etc.).

The calculator divides the upfront cost by the monthly savings to determine exactly how many months it will take to "break even" on the refinance.

When interest rates drop, banks aggressively pitch "lower your payment!" However, refinancing is never free. The thousands of dollars in closing costs mean you start in the red on day one.

If you pay $5,000 to save $100 a month, it takes 50 months (over 4 years) just to recover your costs. If you sell the house or move for a new job in year 3, you actually lost money by refinancing.

Monthly Savings: Current Payment - New Proposed Payment.

Break-Even Timeline: Total Closing Costs / Monthly Savings.

Note: This is a simplified cash flow calculation. A true financial analysis would also account for the fact that refinancing usually resets your amortization schedule back to 30 years, extending the total life of the loan.

• Pearl: A "No Closing Cost" refinance is a myth. The lender is either rolling the costs into the principal balance of the loan, or they are charging you a slightly higher premium interest rate to subsidize the fees.
• Pitfall: Refinancing solely to lower the monthly payment, but inadvertently resetting a 30-year mortgage back to 30 years when you had already paid off 10 years of it. You lowered the payment but increased total lifetime interest paid.
• Pearl: Generally, refinancing makes logical sense if you can drop your interest rate by at least 0.75% to 1.0% AND you plan to stay in the home for at least 3-5 years past the break-even point.