Is it Worth Refinancing Your Mortgage? The Exact Break-Even Calculation Explained

When interest rates fall, homeowners are inundated with flyers promising lower monthly payments through **mortgage refinancing**.

However, refinancing is not free. It is essentially taking out a brand-new loan, which comes with thousands of dollars in closing costs, appraisal fees, processing charges, and legal fees.

To determine if refinancing is actually worth it, you must perform a strict **Break-Even Analysis**. This guide outlines the exact algebraic equations to find out how many months it will take for your interest savings to pay off the refinancing costs.

Step 1: Calculate Your Monthly Interest Savings

First, compute your current monthly payment ($EMI_{\text{old}}$) and your proposed new monthly payment ($EMI_{\text{new}}$). The difference between the two is your monthly savings:

$\text{Monthly Savings} = EMI_{\text{old}} - EMI_{\text{new}}$

*Example:* If your current payment is **$1,200/month** and the new loan is **$1,050/month**, your monthly savings are **$150**.

Step 2: Sum the Total Refinancing Costs

Next, add up all out-of-pocket expenses required to close the new loan. These typically include: * Application and processing fees * Home appraisal fees * Title search and title insurance fees * Legal and notary fees * Origination points

Let us assume your total closing costs sum to **$3,600**.

Step 3: Find the Break-Even Month

The break-even point is the exact month where your monthly savings fully cover the upfront cost of refinancing:

$\text{Break-Even Month} = \frac{\text{Total Refinancing Costs}}{\text{Monthly Savings}}$

Using our values:

$\text{Break-Even Month} = \frac{\text{3,600}}{\text{150}} = 24\text{ months}$

If you plan to stay in your home for **longer than 24 months**, refinancing is highly profitable. If you plan to sell the house or relocate in less than 2 years, refinancing will actually **cost you money**!