How to Calculate Refinancing Mortgage Payback
When you refinance your mortgage loan, you generally get the benefit of a lower interest rate and, therefore, lower monthly payments. However, it usually costs a few thousand dollars to refinance, which means it can take a while to recoup the closing costs from the savings of your refinancing. The time it takes to recover the costs of refinancing is known as the refinancing payback period. To calculate this, determine how much you will save on your monthly payment and the closing costs of the loan.
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Instructions
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Determine how much it will cost to refinance your loan. You can usually get a very reasonable estimate by contacting different lenders.
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Determine the savings on each monthly payment by subtracting the monthly payment after your refinance from the monthly payment before you refinance. For example, if your mortgage payment is currently $2,310 and would be $2,275 if you refinanced, the difference would be $35 per month.
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Determine the number of months it would take to pay back the cost of refinancing by dividing the closing costs by the monthly savings after refinancing. For example, if refinancing saved you $35 a month and the closing costs are $2,130, it would take 61 months, or just over five years, to recoup your closing costs.
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Tips & Warnings
When you refinance your mortgage, you can deduct any points you pay over the life of the loan. In addition, if you have previously refinanced your mortgage, you can deduct any previously undeducted points. For example, if you had only deducted $400 of the $2,000 worth of points you paid on your last loan, you could deduct the remainder in the year you refinance.
