Harrison Loke of the Finandom blog recently wrote about some simple formulas that you can use to decide if refinancing a loan makes sense for you. We here at Political Calculations are always on the lookout for interesting math that we can turn into tools, so we've chosen to take on some of Harrison's formulas as our latest project!
First up, how long will it take for you break-even on the refinancing charges that you will have to pay? The following formula may be used to provide the answer:
The formula above may be used to find the number of months that it will take to at least cover the cost of refinancing. But, the formula makes two assumptions that may or may not be true in your case:
- You are making monthly payments on your existing loan.
- You will be making monthly payments after refinancing.
What if you went from a monthly to a biweekly payment period? Or vice versa? Or making payments at some other interval? The tool below takes the most common payment intervals into account in determining the number of months it will take to break-even after refinancing your loan:
For the tool above, a negative result indicates that you will not at least recover the costs of refinancing.
Why This Might Be Important
The amount of time that it takes to make back the amount of money it cost to refinance your loan is an important factor to consider if you may be retiring the loan in the near future. In the case of a mortgage, for example, if you will be selling your home and moving before breaking even on refinancing - or in the case of a car loan, if you will be trading it in for a newer model.
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