Break Even Point Refinance Calculator

Refinancing your mortgage can save you money, but it's important to understand when it makes financial sense. The break even point is the point at which the savings from refinancing equal the costs of refinancing. This calculator helps you determine that break even point based on your current mortgage terms and the new refinanced terms.

What is the Break Even Point?

The break even point for refinancing refers to the time period after which the savings from refinancing your mortgage will cover the costs of refinancing. It's calculated by comparing the total cost of refinancing (including fees and closing costs) with the savings from the lower interest rate.

For example, if you refinance at a lower interest rate but pay $3,000 in closing costs, the break even point is the number of months it will take for the savings from the lower payments to equal the $3,000.

How to Calculate the Break Even Point

To calculate the break even point for refinancing, you need to know:

Your current mortgage balance
Your current interest rate
The new interest rate you're considering
The closing costs associated with refinancing

The formula for calculating the break even point is:

Break Even Point (months) = (Closing Costs) / (Monthly Savings)

Where Monthly Savings = (Current Monthly Payment - New Monthly Payment)

This formula gives you the number of months it will take for the savings from refinancing to cover the closing costs.

Example Calculation

Let's say you have a $200,000 mortgage with a 5% interest rate, and you're considering refinancing to a 4% interest rate. Your current monthly payment is $1,264.71, and your new monthly payment would be $1,104.17. The closing costs for refinancing are $3,000.

The monthly savings from refinancing is $1,264.71 - $1,104.17 = $160.54 per month.

The break even point is calculated as $3,000 / $160.54 ≈ 18.66 months.

This means it will take approximately 18.66 months for the savings from refinancing to cover the $3,000 in closing costs.

Description	Value
Current Mortgage Balance	$200,000
Current Interest Rate	5%
New Interest Rate	4%
Current Monthly Payment	$1,264.71
New Monthly Payment	$1,104.17
Closing Costs	$3,000
Monthly Savings	$160.54
Break Even Point	18.66 months

When to Refinance

Refinancing makes financial sense if the break even point is less than the time you plan to stay in your home. If the break even point is longer than your planned tenure, refinancing may not be cost-effective.

Other factors to consider when deciding whether to refinance include:

Changes in your financial situation
Market conditions and interest rate trends
Your ability to qualify for a lower interest rate
Potential tax benefits from refinancing

Always consult with a financial advisor or mortgage professional before making a decision about refinancing. They can provide personalized advice based on your specific situation.

FAQ

What is the difference between the break even point and the payback period?: The break even point is the time it takes for the savings from refinancing to cover the costs of refinancing. The payback period is the time it takes to recover the total amount invested in refinancing, including both the closing costs and the difference in interest payments.
How do closing costs affect the break even point?: Higher closing costs will increase the break even point, meaning it will take longer for the savings from refinancing to cover the costs. Lower closing costs will decrease the break even point.
Is refinancing always a good idea?: Refinancing may not always be the best financial decision. It's important to consider the break even point, your planned tenure in the home, and other factors such as changes in your financial situation or market conditions.
Can I use this calculator for reverse mortgages?: This calculator is designed for traditional refinancing scenarios. Reverse mortgages have different calculations and considerations, so you may need a specialized calculator for that purpose.
How often should I check my break even point?: It's a good idea to review your break even point periodically, especially if interest rates are changing or your financial situation is evolving. This will help you make informed decisions about refinancing.