Clark Howard’s Special Rule for Refinancing Your Mortgage

Do favorable interest rates have you contemplating refinancing your mortgage?

Before you take the leap and pay for things like appraisals, points and closing fees, you’ll want to make sure that investment will actually save you money in the long run.

If you’ve been a long-time listener of money expert Clark Howard’s radio show or podcast, you probably have heard him talk about his 30-month breakeven rule for refinancing your house.

Clark believes that you should be able to see a path for recouping your refinancing costs through interest savings within the first 30 months of the new mortgage before you proceed.

This article will better explain what the breakeven rule is, how Clark came up with it, how to apply it and some potential nuances to consider.

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What Is Clark Howard’s Breakeven Rule for Mortgage Refinance?

When considering refinancing a mortgage, Clark Howard believes that most people can use his 30-month breakeven method to decide whether or not to go through with it.

“If you can make back the cost of the refinance in 30 months or less, you should do it,” Clark says. “It just makes financial sense. That’s the trigger.”

So what is the rule exactly?

Change in Interest vs. Change in Payment

Clark wants you to break even on your refinancing costs (closing costs, points, etc.) within 30 months.

But when he says that, Clark is referring to mortgage interest savings — not mortgage payment savings.

This is an important distinction because many other mortgage calculators use payment savings as a determining factor. Doing so could get you into a tough spot. Why?

Because you could refinance into a 30-year mortgage and see a big monthly payment reduction but still not save on interest. Clark says that saving on interest is necessary because otherwise, you’re just kicking the can down the road on the total balance you owe.

The interest savings is a necessary line of measurement because it has a direct impact on how much of the money you pay each month is going toward paying down the principal of your loan.

For example, if you pay $5,000 in total costs to refinance your mortgage, Clark says you should be able to expect recouping at least $5,000 in interest savings within 2.5 years for this to be a financially prudent decision.

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Why Clark Uses 30 Months as the Payback Sweet Spot

Clark has referenced 30 months as the sweet spot for breaking even on a refinance for so long that listeners might believe it to be a hard, mathematical rule.

But Clark says he considers the 30-month breakeven method more of an “article of faith to give people a road map.”

Clark says he originally came up with it as an arbitrary number that could fit most mortgage refinancing scenarios. That way, he is able to give consistent advice that he believes will help the majority of people weighing their refinancing options.

“If people are trying to figure out if it worth it for them to re-fi, in virtually every situation you can think of a 30-month payback should work out,” Clark explained.

Let’s take a look at a sample mortgage refinancing scenario to better understand what Clark is talking about:

Sample Mortgage Refinance with 30-Month Rule Applied

In this example, we took an existing 30-year loan for $302,000. It has a $297,000 balance with 29 years remaining. We plan to refinance to a 15-year loan at a better rate (2.75% vs. 3.75%). We assumed a total of $5,000 in closing costs to be rolled into the new mortgage.

Will we get our money back on that refinance in the first 30 months based on interest savings alone?

Let’s calculate based on the interest payments due for both the new loan and the previous loan.

Here’s the amortization schedule for the first 30 months of the new 15-year mortgage:

If you totaled up the interest column, you’d find that you’re paying $19,379 in mortgage interest during the first 30 periods of the new loan.

If you had stayed with the original 30-year mortgage, you would have paid approximately $27,457 in interest over that same 30-month period.

By refinancing, you’d save more than $8,000 in interest payments during the first 30 months of the new loan. That easily clears Clark’s 30-month breakeven hurdle. In fact, you would reach your breakeven point by Month 21 in this scenario.

Clark would give your refinancing plan a full endorsement, provided that you could handle the increased monthly payment going to the 15-year loan.

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There Are Some Potential Exceptions to the Rule

Like many things in life, there are nuances to be aware of when it comes to mortgage refinancing.

There are some factors that could override your results when you plug your numbers into Clark’s 30-month test.

How Long Do You Plan to Stay in the Home?

This is probably the top question that could alter your decision-making process on refinancing. Clark uses 30 months as a way of building in the idea that you need to know you’ll be in the home for at least the next two-and-a-half years in order to justify refinancing.

But if you know for sure that you’ll be in the house for decades to come, you can relax a little on the idea of breaking even at 30 months vs. 40 months, for example. Either would be a financially prudent decision if you know the loan will long outlast the breakeven point.

However, keep in mind that life happens and people change homes. According to 2020 data from the National Association of Realtors, the median duration of homeownership in the Top 100 U.S. markets varies widely between six and 18 years.

Avoid Lengthening Your Loan

Here’s an area where Clark’s 30-month breakeven method may say “yes,” but you may still need to say “no” to the refinanced loan.

If you have fewer than 30 years remaining on your loan and you run the numbers on refinancing into a new 30-year loan, you’re almost always going to see a short-term reduction in your payment amount. It may even be a loan that breaks even on closing costs within 30 months.

But Clark never wants you to go backward on your mortgage term. Doing so could be a real loser in the long run when it comes to interest.

“If you have 23 years left on your mortgage, don’t go into a new 30-year loan,” Clark says. “If you can’t afford the payment of a new 15-year loan, it’d be much better if you go into a 20-year loan. Or do anything other than lengthening the term of your loan because you’re going backward.”

Another reason to avoid lengthening your loan is to do your future self a favor. You may be young and spry now, but think a few decades into the future when you’re making this long-term decision.

“Let’s say you’re 42 years old and considering refinancing,” Clark said. “Would you really like the idea of having a mortgage payment until you’re 72 years old?”

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Use Clark’s New Mortgage Calculator to See if Refinancing Is Right for You

Clark is so passionate about the 30-month breakeven model that he has commissioned a free mortgage refinancing calculator for everyone to use on Clark.com.

And, as you may have guessed, this calculator is different from many of the others you may find on the internet because it gives specific advice based on your personal situation as it pertains to the 30-month breakeven method.

When you sit down to use the refinancing calculator, you’re going to need information on both your current mortgage and the new one that you’re considering.

Here’s a list of items to have handy:

• Original loan amount
• Original loan term
• Current mortgage balance
• Years remaining on current mortgage
• The interest rate of current mortgage
• Proposed new interest rate
• Refinanced loan term
• Closing costs associated with refinance
• Any points on the new loan

Once you have those numbers in hand, using Clark’s calculator is a breeze. In less than a minute, you can have all of those numbers plugged in and be on your way to instant feedback on your refinance proposal:

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Final Thoughts

If you are considering refinancing your mortgage, you should give some serious consideration to Clark’s 30-month breakeven method.

It has produced many success stories over the years for lowering the cost of owning a home.

Interest rates are at all-time lows, and many people are rightfully considering a mortgage refinance. But before you take the plunge, take Clark’s advice and use his refinancing calculator to make sure that you’re making the best long-term financial decision.

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