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Does refinancing still pay off after restarting the amortization schedule?
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I’m evaluating a refinance intended to shorten the payoff period, but I’m concerned that the savings may look better on paper than they are after closing costs and the new loan’s early amortization.
The comparison I’m trying to make is between refinancing and keeping the current mortgage while applying the same proposed monthly payment, including any planned extra principal, to the existing loan. I’d like to calculate the point at which the refinance actually breaks even rather than assuming that a lower rate or shorter term automatically saves money.
For a meaningful comparison, I’m gathering the current balance, interest rate, remaining term, and required payment, along with the proposed rate, term, total lender fees, prepaid interest, and the time I expect to remain in the property. Are prepaid items normally included in the break-even calculation, or should they be separated from true refinancing costs? I’m also interested in how others account for the fact that the new loan restarts its amortization schedule.
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Prepaid interest, property taxes, and insurance are usually best separated from refinance costs. They are timing or escrow items rather than necessarily incremental costs of getting the new loan, and the old escrow balance may be refunded or credited. For a basic break-even calculation, focus on nonrecoverable lender and settlement fees.
For the fuller comparison, use the date you expect to sell or refinance again and compare both the remaining loan balance and the cash paid under each option. Under the existing loan, apply the proposed total payment, including extra principal. Under the refinance, include the new loan’s nonrecoverable costs and use the proposed payment, taking care to reflect whether costs are paid upfront or financed.
If you plan to make the same total monthly payment either way, the refinance’s benefit should show up primarily in the lower balance at that horizon. If the monthly payments differ, include the difference in cash retained or invested as well. That addresses the new amortization schedule without counting every closing item as a permanent financing loss.
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