Calculate potential savings from refinancing your mortgage or loan
Refinancing involves replacing your current loan with a new one, typically to secure a lower interest rate, reduce monthly payments, or change loan terms. While refinancing can save you money, it comes with closing costs that must be factored into your decision. The break-even point tells you how long it will take to recoup these costs through monthly savings.
The traditional rule of thumb is to refinance when you can reduce your interest rate by at least 0.5-1%. However, even smaller reductions can be worthwhile if you plan to stay in your home long enough to reach the break-even point.
If your credit score has improved significantly since you took out your original loan, you may qualify for better rates. A score increase of 50+ points can make a substantial difference in the rates you're offered.
You might refinance to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage for payment stability, or to shorten your loan term to build equity faster and save on total interest.
If you've built significant equity in your home, you can refinance for more than you owe and take the difference in cash. This can be useful for home improvements, debt consolidation, or other major expenses.
Refinancing typically costs 2-5% of your loan amount. Understanding these costs is crucial for determining if refinancing makes financial sense:
Covers the lender's cost to process your application. Typically $75-$300.
Charged by the lender for processing the new loan. Usually 0.5-1% of the loan amount.
Required to determine your home's current market value. Typically $300-$500.
Ensures there are no liens on the property and protects the lender. Usually $700-$1,000.
Some states require an attorney to be present at closing. Typically $500-$1,000.
The break-even point is the number of months it takes for your monthly savings to equal your refinancing costs. This is a critical metric for deciding whether to refinance:
Excellent opportunity to refinance. You'll recoup costs quickly and start saving money soon.
Good opportunity if you plan to stay in your home for at least this long. Consider your future plans carefully.
May not be worth it unless you're certain you'll stay in your home long-term. Consider other factors like payment stability or term reduction.
The most common type, where you refinance to get a better interest rate or change your loan term without taking cash out. Best for reducing monthly payments or paying off your loan faster.
Refinancing from a 30-year to a 15-year mortgage can save you tens of thousands in interest, though your monthly payment will be higher. This builds equity faster and gets you mortgage-free sooner.
Some lenders offer refinancing with no upfront costs by rolling the fees into your loan balance or charging a slightly higher interest rate. This can be beneficial if you don't have cash for closing costs or plan to move soon.
Interest rates and fees can vary significantly between lenders. Get quotes from at least 3-5 lenders to ensure you're getting the best deal. Even a 0.125% difference in rate can save thousands over the life of your loan.
A lower monthly payment isn't always better if you're extending your loan term. You might pay less each month but significantly more in total interest over the life of the loan.
Don't just look at the interest rate. Factor in all closing costs to determine your true savings and break-even point. Sometimes a slightly higher rate with lower fees is the better deal.
Each time you refinance, you reset your loan and pay closing costs. Refinancing multiple times can negate any savings and keep you in debt longer.
If you plan to move before reaching your break-even point, refinancing will cost you money rather than save it. Be realistic about how long you'll stay in your home.
Maximize your refinancing benefits with these strategies:
Calculate monthly mortgage payments and total interest
Calculate loan payments and interest costs
Project your savings growth over time
Calculate investment returns and growth
See how compound interest grows your investments
Calculate return on investment percentage