Sarah Miller is a Certified Mortgage Broker with 12 years of experience specializing in loan refinancing strategies. Her practical expertise ensures the integrity and financial relevance of this calculation tool.
Welcome to the **Refinance Break-Even Calculator**. This essential financial tool helps you determine exactly when the savings from a new mortgage rate will offset your total refinancing costs. Enter any three variables—Total Costs, Current Payment, New Payment, or desired Break-Even Time—to solve for the fourth and make a data-driven decision.
Refinance Break-Even Calculator
Refinance Break-Even Formula
The core relationship is:
$$ F = Q \times (P – V) $$
Four Forms of the Formula:
\(\mathbf{Q} (\text{Time}) = F / (P – V)\)
\(\mathbf{F} (\text{Costs}) = Q \times (P – V)\)
\(\mathbf{P} (\text{Old Pmt}) = (F / Q) + V\)
\(\mathbf{V} (\text{New Pmt}) = P – (F / Q)\)
Variables Explained:
- F: Total Refinancing Costs (Currency) – The total fixed cost to complete the refinance (closing costs, fees, etc.).
- P: Current Monthly Payment (Currency) – Your existing monthly principal and interest (P&I) payment.
- V: New Estimated Monthly Payment (Currency) – The estimated P&I payment under the new loan structure.
- Q: Break-Even Time (Months) – The number of months it takes for the monthly savings (P-V) to equal the fixed costs (F).
Related Calculators
To fully evaluate your refinance decision, we recommend using these linked tools:
- Amortization Schedule Calculator: Essential for calculating the exact P&I amounts needed for P and V.
- How much can I save by refinancing calculator: A broader view of total interest savings over the loan life.
- Mortgage APR vs Interest Rate Calculator: Understand the true cost of the loan, crucial for accurately determining the New Payment (V).
- Refinance closing costs calculator: Get a detailed estimate of the variable F (Total Refinancing Costs) for maximum accuracy.
What is Refinance Break-Even?
The Refinance Break-Even Point (BEP) is a critical metric that shows how many months it will take for the money saved from the new, lower monthly mortgage payment to completely recoup the upfront costs of the refinancing process.
For example, if the refinancing costs are $5,000 and your new loan saves you $100 per month, your BEP is 50 months ($5,000 / $100). If you plan to stay in the home for more than 50 months, refinancing is financially sound. If you plan to move sooner, the upfront costs will outweigh the savings.
Lenders often focus on the lower rate, but savvy homeowners must focus on the **break-even time** to ensure the transaction provides a net financial benefit before they sell or refinance again. The goal is always to have a short break-even window.
How to Calculate Refinance Break-Even (Example)
Let’s find the required **New Monthly Payment (V)** to break even in exactly 40 months, given the following scenario:
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Step 1: Identify Known Variables.
Total Refinancing Costs (F) = $4,800. Current Monthly Payment (P) = $1,900. Desired Break-Even Time (Q) = 40 months. We need to solve for V.
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Step 2: Calculate Required Monthly Savings.
Savings needed = $F / Q = \$4,800 / 40 = \$120$ per month.
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Step 3: Apply the Formula for V.
The New Payment must be the Old Payment minus the Required Monthly Savings: $V = P – (\text{Savings}) = \$1,900 – \$120 = \$1,780$.
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Step 4: Conclusion.
To break even in 40 months, the new loan’s monthly payment must be $1,780 or lower.
Frequently Asked Questions (FAQ)
A: The ideal BEP is as short as possible. A break-even period of 36 months (3 years) or less is generally considered excellent, especially if you plan to stay in the home long-term. If the BEP is near or beyond your expected time in the home, refinancing is not recommended.
Q: Do I include taxes and insurance in my monthly payments (P and V)?A: For the break-even calculation, you should typically use the P&I (Principal and Interest) portions only, as property taxes and homeowners insurance generally remain the same regardless of which loan you choose. Focus on the difference in the P&I payment.
Q: What happens if the New Payment (V) is higher than the Current Payment (P)?A: If V > P, you have a negative monthly saving, meaning you will never break even. This might happen if you are refinancing to pull cash out or dramatically shorten the loan term, which are different financial goals than achieving monthly savings.
Q: How does this relate to the “Loan-to-value ratio calculator”?A: Your Loan-to-Value (LTV) ratio determines your eligibility and interest rate. A lower LTV can secure a better rate, leading to a smaller V (New Payment) and a shorter break-even time (Q).