Refinancing a mortgage offers an opportunity to save money if you can get a lower interest rate than you're currently paying. But refinancing costs money as well – closing costs can run from 2-6 percent of the loan amount. So how do you know if you're lowering your mortgage rate enough to offset those costs?

This Refinance Break-Even Calculator will help you figure out how long it will take your savings from a reduced mortgage rate to offset the costs incurred by refinancing. It can also take into account the effect on your tax deductions and help you decide whether it's worth it to pay for discount points or not.

Refinance Break-Even Calculator Overview

So when is it worthwhile to refinance your mortgage?  The usual rule of thumb these days is that you should be able to reduce your mortgage rate by at least 1 percentage point when refinancing, but that's a fairly conservative figure.  What really matters is how quickly you can recoup your closing costs compared to how long you'll have the mortgage.

Reducing your mortgage rate by a full percent might allow you to recover your closing costs in less than four years. That's pretty quick and would likely be worth your while.  But if you're planning to move in the next three years, you won't recover your closing costs.

On the other hand, a refinance that takes eight years to recover your costs may offer only a marginal benefit. But if you have 20 years left on your mortgage, plan to stay in the home that long and don't expect rates to fall any lower, it could be worth considering.

Some people don't save as much as they expect when refinancing because they fail to take into account the tax impacts. If you itemize deductions, there's a good chance you take a deduction for mortgage interest. But if you refinance to a lower rate, your deduction shrinks and you pay more taxes.  The calculator has a feature that lets you take that into account.

 

Using the Refinance Break-Even Calculator

The calculator is mostly self-explanatory, though a few things may need clarification:

  • Under "Original mortgage" enter the appraised value of your home at the time you took out the loan. This is to allow the calculator to account for the cost of private mortgage insurance (PMI), if applicable.
  • Enter your tax bracket percentage under "Income tax rate."
  • Under "New mortgage" you can either enter your current mortgage balance or allow the calculator to figure it out for you, based on the regular amortization of your original loan.
  • The "Loan origination rate" is the percentage of the loan amount your lender will charge for originating the loan.  You can enter figures up to two decimal places if you wish.
  • Use "Points paid" to see how paying for discount points would affect your break-even point.
  • "Other closing costs" are fees charged by the lender in addition to the origination charge.
  • The calculator normally figures the impact of PMI automatically; uncheck the PMI box if you wish to omit this from the calculation.

You'll be presented with four scenarios for your refinance break-even point:

  • Monthly payment savings is based solely on the reduction in your monthly mortgage payment
  • PMI and interest savings is based on the reduction in your monthly payment and the effect of paying or eliminating PMI
  • Total savings after taxes takes into account the change in your mortgage interest tax deduction
  • Total savings vs. prepayment adds the savings in mortgage interest you'd realize from paying your closing costs up front rather than rolling them into the loan.

If you chose a shorter term for your new mortgage than the time remaining on your old one, your savings will be reflected in the "Total remaining payments" box.

Clicking "View report" will provide a full breakdown of the old loan vs. the new one.

 

Want to get started? Use the "Get free quote" button at the top of the page to request personal refinance quotes from lenders.

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