Mortgage and lending expert with 20+ years of experience analyzing refinance costs and long-term debt strategy.
The **Refinance Break Even Calculator** is a crucial tool used to determine how long it will take for the monthly savings from a new loan to cover the upfront closing costs. Enter any three variables to solve for the missing one, typically the Months to Break Even.
Refinance Break Even Calculator
Refinance Break Even Formula Variations
The calculation is based on dividing the closing costs by the net monthly savings (Old Payment minus New Payment).
Let $C_{Cost}$ = Total Closing Costs, $M_{Save}$ = Monthly Savings, and $Q$ = Months to Break Even.
Formula Source: NerdWallet – Refinance Break-Even
Solving for each variable:
Q (Months) = C_Cost ÷ M_Save
C_Cost (Costs) = Q × M_Save
M_Save (Savings) = C_Cost ÷ Q
Variables Explained
- F (Total Closing Costs): The sum of all upfront fees required to close the new refinance loan.
- P (Current Monthly Payment): The total monthly payment (P&I) on your existing loan.
- V (New Monthly Payment): The total monthly payment (P&I) on the proposed new loan.
- Q (Months to Break Even): The number of months it takes for the monthly savings (P-V) to equal the initial closing costs (F).
Related Calculators
- Refinance Cost Comparison Calculator
- Total Interest Cost Calculator (New vs. Old)
- Debt Consolidation Savings Calculator
- Home Equity Line of Credit (HELOC) Calculator
What is the Refinance Break Even Point?
The **refinance break even point** is the amount of time—usually expressed in months—required for the monthly savings gained from refinancing a loan (due to a lower rate or smaller payment) to fully recoup the upfront closing costs paid to execute the refinance. After the break-even point, every subsequent monthly saving represents a true net financial gain.
This metric is critical because if you plan to move or pay off the loan before the break-even point is reached, the refinance will result in a net financial loss due to the unrecouped closing costs. Financial planners often advise against refinancing if the break-even point exceeds the time you plan to hold the debt.
How to Calculate Break Even (Example)
Let’s solve for Months to Break Even (Q):
- Gather Variables:
Total Closing Costs (F) = $4,000
Current Monthly Payment (P) = $1,900
New Monthly Payment (V) = $1,750
- Calculate Monthly Savings (M_Save):
$$M_{Save} = P – V = \$1,900 – \$1,750 = \$150$$
- Apply the Break Even Formula:
$$Q = \text{Closing Costs} \div \text{Monthly Savings}$$
- Final Result:
$$\$4,000 \div \$150 \approx 26.67 \text{ months}$$
The break even point is approximately 27 months (since you must complete the 27th payment).
Frequently Asked Questions (FAQ)
A good break-even period is generally 24 months (2 years) or less. However, the best break-even point is one that is significantly shorter than the time you plan to keep the loan.
Does this calculator consider the time value of money?No, this simple calculation ignores the time value of money (interest that could be earned on the closing cost money). For a more advanced analysis, a net present value calculation is required.
What if the new monthly payment (V) is higher than the current one (P)?If the new payment is higher (P < V), the monthly savings is negative, meaning there is no break-even point and the refinance is likely only worthwhile if you are refinancing to consolidate debt or switch from an adjustable to a fixed rate.
Should I include Escrow in the payment amounts (P and V)?For an accurate break-even analysis, you should use only the Principal and Interest (P&I) components of the payments, as the escrow components (Taxes and Insurance) typically remain unchanged or are simply passed through to the lender.