How to Calculate Refinance Savings
Refinancing replaces your current mortgage with a new loan at a different rate or term. To evaluate the benefit, calculate the monthly payment for both loans using M = P[r(1+r)^n] / [(1+r)^n − 1]. Your monthly savings is the difference between the old and new payment. The break-even point = closing costs / monthly savings. For example, if refinancing from 7% to 5.75% on a $280,000 balance saves $220/month and closing costs are $5,500, the break-even is 25 months. If you plan to stay longer than 25 months, refinancing makes financial sense.