How to Calculate Your Potential Refinance Savings
Before you refinance, you want to know one thing: will it save me money? The short version: divide your total closing costs by your monthly payment savings to find your break-even month — if you will keep the loan longer than that, the refinance could save you money. After 17 years helping homeowners across the country work through this exact math, I have a simple framework that anyone can use in a few minutes.
Step 1: Find Your Monthly Savings
Compare your current monthly payment to the estimated payment on a new loan. The difference is your monthly savings.
If your new payment would be lower, that is money back in your pocket every month. But do not stop there. You need to factor in the cost of getting that savings.
Step 2: Calculate Your Break-Even Point
Take your total estimated closing costs and divide by your monthly savings. The result is the number of months until the refinance pays for itself.
This is the most important number in the entire decision. If you plan to stay in your home past the break-even point, the refinance could pay off.
Step 3: Look at Total Interest Savings
If you are keeping the same loan term or going shorter, compare the total interest you would pay on the new loan versus the total remaining interest on your current loan. The difference can be substantial, especially over a 15-year or 30-year period.
Be careful with this number if you are extending your term. A new 30-year loan will have more total interest than the 20 years remaining on your current loan, even if the rate is lower.
Step 4: Factor in the Full Picture
Consider these additional items:
PMI changes. If the refinance removes PMI, add that savings to your monthly benefit.
Escrow changes. Your property taxes and insurance may be escrowed differently with the new loan. This can change your total monthly payment even though it is not really a refinance cost.
Opportunity cost. If you pay closing costs out of pocket, that is money you could have invested elsewhere. For most homeowners, this is a minor factor, but it is worth considering.
The Quick Version
Monthly savings multiplied by the number of months you will keep the loan, minus closing costs. If that number is positive, the refinance could save you money.
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