What is a breakeven point in refinancing?

The breakeven point is the amount of time it takes for your monthly savings to cover the total closing costs of the refinance. If you plan to sell your home or pay off the loan before this point, refinancing may not be worth it.

What are closing costs?

Closing costs are fees charged by the lender to process a new loan. They can include application fees, appraisal fees, title insurance, and other charges. They typically range from 2% to 5% of the new loan amount.

When is a good time to refinance?

A good time to refinance is when current interest rates are significantly lower than your existing rate (often a 1% drop is a good benchmark), you plan to stay in your home long enough to pass the breakeven point, and your credit score has improved, making you eligible for better rates.

Loan Refinance Calculator

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Is Refinancing Like Upgrading Your Car?

Think of your current loan (especially a mortgage) like an older car. It gets you where you need to go, but maybe its fuel efficiency isn't great, and the monthly "fuel" cost (your interest payment) is high. Refinancing is like trading in that old car for a new, more efficient model.

The new car might have a lower monthly fuel cost (lower interest rate), saving you money on every trip. However, there's a cost to get the new car—the "closing costs." The most important question, which this calculator answers, is: Will the monthly fuel savings eventually pay for the cost of the new car, and will you own the car long enough to enjoy those savings? This is your "breakeven point." If you plan to sell the car (or your house) before you break even, the "upgrade" wasn't worth it.

Related Financial Tools

Loan EMI Calculator: Calculate the payment for any single loan.
Loan Prepayment Calculator: See if paying extra on your current loan is a better option than refinancing.
Debt-to-Income (DTI) Ratio Calculator: Check your DTI before applying for a refinance to improve your approval chances.

Frequently Asked Questions

What is the "breakeven point" and why is it important?

The breakeven point is the number of months it takes for your savings from a lower monthly payment to completely cover the one-time closing costs of the refinance. It's the most critical factor in deciding if refinancing is worthwhile. If you plan to move or sell before you reach the breakeven point, you'll lose money on the deal.

Should I choose a shorter or longer term for my new loan?

It depends on your goal. A shorter term (e.g., refinancing a 30-year mortgage to a 15-year) will have higher monthly payments but will save you a massive amount of interest and help you build equity faster. A longer term can significantly lower your monthly payment, freeing up cash flow, but you may pay more interest over the life of the loan.

Does refinancing hurt your credit score?

Initially, yes, but it's usually a small, temporary dip. When you apply, the lender makes a "hard inquiry" on your credit, which can lower your score by a few points. Opening a new loan also slightly reduces the average age of your credit accounts. However, if you make your new payments on time, your score will typically recover and even improve over the long term.