Loan Refinancing Breakeven Calculator

• What is Loan Refinancing Breakeven?
• The Loan Refinancing Breakeven Formula
• How to Calculate Loan Refinancing Breakeven

What is Loan Refinancing Breakeven?

Loan refinancing breakeven refers to the point at which the savings from refinancing a loan equal the costs incurred during the refinancing process. In simple terms, it's the time it takes to recover the expenses of refinancing, such as closing costs, through the monthly savings achieved by securing a lower interest rate or extended loan term.

For homeowners, car owners, or anyone with a significant loan, refinancing can be a powerful way to reduce monthly payments or overall interest paid. However, understanding when you'll start to see financial benefits is crucial to making an informed decision.

The Loan Refinancing Breakeven Formula

To calculate the breakeven period for a loan refinance, you can use the following formula:

\text{Months to Break-Even} = \dfrac{\text{Closing Costs}}{\text{Monthly Savings}}

• Closing Costs: The total expenses associated with refinancing, such as application fees, appraisal fees, and other administrative costs.
• Monthly Savings: The difference between the monthly payment on your current loan and the new loan after refinancing.

How to Calculate Loan Refinancing Breakeven

• Calculate the Monthly Payment for Your Current Loan: Use the formula for loan amortization: \text{Monthly Payment} = \dfrac{\text{Loan Amount} \times \text{Monthly Interest Rate}}{1 - (1 + \text{Monthly Interest Rate})^{\text{Loan Term(months)}}} Here, the Monthly Interest Rate is the annual interest rate divided by 12.
• Calculate the Monthly Payment for the New Loan: Use the same formula but substitute the new interest rate and loan term.
• Determine Monthly Savings: Subtract the new monthly payment from the current monthly payment.
• Calculate the Breakeven Period: Divide the total closing costs by the monthly savings.
• Compare Total Interest Costs: To determine the long-term benefits, calculate the total interest paid over the life of both loans and see how much interest you save by refinancing.

How to Use the Loan Refinancing Breakeven Calculator

Our calculator simplifies these calculations for you. Here’s how you can use it:

• Input the Current Loan Balance: Enter the outstanding balance of your existing loan.
• Enter the Current Interest Rate: Provide the annual interest rate of your current loan.
• Specify the Remaining Loan Term (in months): Enter the number of months left on your current loan.
• Provide the New Interest Rate: Input the annual interest rate for the refinanced loan.
• Specify the New Loan Term (in months): Enter the term of the refinanced loan in months.
• Input Closing Costs: Add the total costs associated with refinancing.

The calculator will instantly provide:

• The number of months to break even.
• Current and new monthly payments.
• Monthly savings.
• Total interest saved.

Example: Loan Refinancing Breakeven Calculation

Scenario

• Current Loan Balance: $200,000
• Current Interest Rate: 4.5%
• Remaining Loan Term: 240 months (20 years)
• New Interest Rate: 3.5%
• New Loan Term: 240 months (20 years)
• Closing Costs: $4,000

Step 1: Calculate Current Monthly Payment

Using the loan amortization formula:

\text{Monthly Payment} = \dfrac{200000 \times \frac{4.5}{100}/12}{1-(1+\frac{4.5}{100}/12)^{-240}}=1266.71

Step 2: Calculate New Monthly Payment

\text{Monthly Payment} = \dfrac{200000 \times \frac{3.5}{100}/12}{1-(1+\frac{3.5}{100}/12)^{-240}}=1122.61

Step 3: Determine Monthly Savings

\text{Monthly Savings} = 1266.71 - 1122.61 = 144.1

Step 4: Calculate Breakeven Period

\text{Months to Break-even} = \dfrac{4000}{144.1} = 27.75 = 28 \text{months}

Step 5: Calculate Total Interest Saved

Current Total Interest:

1266.71 \times 240 - 200000 = 103610.4

New Total Interest:

1122.61 \times 240 - 200000 = 69426.4

Interest Saved:

103610.4−69426.4=34184