Determine your potential savings and break-even point when refinancing your mortgage.
Mortgage Refi Calculator
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Mortgage Refi Calculator Formula
The core of refinancing calculation is the standard amortization formula:
$$ M = P \left[ \frac{i (1+i)^n}{(1+i)^n – 1} \right] $$Where:
- M = New Monthly Payment
- P = Principal (Current Remaining Balance)
- i = Monthly Interest Rate (New Annual Rate / 1200)
- n = Total Number of Payments (New Term in Years * 12)
Break-Even Point (BEP) = Total Closing Costs / Monthly Savings
Formula Source: Investopedia – Mortgage Payment
Variables Explained
- Current Remaining Balance: The total outstanding principal left on your existing mortgage. This is the new principal for your refinanced loan.
- Current Monthly Payment: The monthly Principal & Interest (P&I) amount you are currently paying.
- Current Interest Rate: The annual percentage rate (APR) of your existing loan.
- New Proposed Interest Rate: The lower annual rate you expect to secure with the new refinanced loan.
- New Loan Term: The length (in years) of the new loan. Commonly 15 or 30 years.
- Total Refinancing Closing Costs: All fees associated with the new loan, including appraisal, legal fees, title insurance, and origination fees.
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What is Mortgage Refinancing?
Mortgage refinancing is the process of paying off your existing loan with a new loan. The primary goals are typically to lower your interest rate, which reduces your monthly payment, or to change your loan term (e.g., from 30 years to 15 years).
Refinancing is financially worthwhile if the savings achieved from the lower monthly payments eventually outweigh the one-time closing costs associated with the new loan. The Mortgage Refi Calculator is designed to calculate this “break-even point,” telling you exactly how many months it will take to recoup those costs.
Beyond rate and term, some homeowners use refinancing to switch from an Adjustable-Rate Mortgage (ARM) to a fixed-rate loan, or to pull cash out of their home equity (a cash-out refinance) for large expenses like home renovations or debt consolidation.
How to Calculate Refi Savings (Example)
- Determine New Monthly Payment: Use the amortization formula with your current balance, new rate (divided by 1200), and new term (multiplied by 12) to find the new P&I payment.
- Calculate Monthly Savings: Subtract the New Monthly Payment from your Current Monthly Payment. If the result is positive, you have savings.
- Identify Break-Even Point: Divide your Total Refinancing Closing Costs by the Monthly Savings. This result is the number of months required to recoup the closing costs.
- Evaluate Profitability: If the break-even point is shorter than the time you plan to stay in the home, the refinance is generally a good financial decision.
Frequently Asked Questions (FAQ)
Is refinancing always a good idea?
No. If you plan to move before reaching the break-even point, the closing costs will likely outweigh your monthly savings, resulting in a net loss.
What is a typical closing cost for refinancing?
Closing costs typically range from 2% to 5% of the loan principal. They cover appraisal fees, title searches, loan origination fees, and other administrative costs.
Can I refinance if I have bad credit?
It’s possible, but challenging. Lenders prefer a credit score of 620 or higher. A lower score will likely result in a higher new interest rate, potentially negating any savings.
What is the break-even point?
The break-even point is the specific month in which the cumulative monthly savings from your lower payment equals the total cost you paid in refinancing fees.