Calculate how long it takes to recover fee financing cost.
In order to calculate how long it will take you to recover the refinancing cost with your reduced monthly payment, the calculation is quite simple. You divide your refinancing cost with your after-tax monthly savings and that will give you the number of months in which he would break even. Using an example where it costs you $4000 to refinance and you save an after-tax $180 on your monthly mortgage payment, this simple calculation were $4000 divided by $180 gives you 22.2 months. This is how long it would take for you to recover those $4000 that you spend in your refinancing cost. After this whatever money is saved every month is pure savings. For example, in the next five years, which is 16 months you will recover $180 multiplied by 60 which equals two $10,800 minus the $4000 cost which gives you a saving of $6800.
Even in this example we have ignored state income taxes. Some states have significant income taxes and different rules regarding how this taxation is implemented. Be sure to factor in those lost tax savings into a refinance calculations as well.