Break Even Refinance Mortgage Calculation

Refinancing your mortgage can save you money, but it's important to understand when the savings will actually start. The break even point is the time when the total 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 a Break Even Refinance?

A break even refinance is a mortgage refinancing strategy where the borrower pays a fee to refinance but expects to save money on interest payments over time. The break even point is the time when the total savings from lower interest rates equal the total costs of refinancing.

For example, if you pay $3,000 in closing costs to refinance and expect to save $100 per month on interest, the break even point would be when the total savings equal the closing costs. This is calculated by dividing the closing costs by the monthly savings.

Break Even Months = Closing Costs / Monthly Interest Savings

Understanding the break even point helps you determine whether refinancing is financially beneficial in the short term and long term.

How to Calculate Break Even Refinance

Calculating the break even point for a mortgage refinance involves several steps:

Determine your current mortgage balance and interest rate.
Get quotes from lenders for refinancing, including closing costs and new interest rates.
Calculate your current monthly payment and the new monthly payment with the refinanced terms.
Determine the difference in monthly payments (monthly savings).
Add up all closing costs associated with refinancing.
Divide the total closing costs by the monthly savings to find the break even point in months.

Note: The break even calculation assumes you will keep the mortgage for the entire period. If you sell the property before the break even point, refinancing may not be cost-effective.

Factors Affecting Break Even Point

Several factors can affect when your mortgage refinance breaks even:

Interest rate difference: A larger difference between your current rate and the refinanced rate will result in greater monthly savings.
Closing costs: Higher closing costs will increase the break even point.
Loan term: Shorter loan terms generally result in higher monthly payments and faster break even points.
Current mortgage balance: A higher balance will result in greater monthly savings, potentially reducing the break even point.

Understanding these factors can help you make a more informed decision about whether to refinance your mortgage.

Example Calculation

Let's look at an example to illustrate how to calculate the break even point for a mortgage refinance.

Current Mortgage Terms

Balance: $200,000
Interest rate: 6.5%
Term: 30 years
Monthly payment: $1,243.33

Refinanced Terms

Interest rate: 5.5%
Term: 30 years
Closing costs: $3,500
New monthly payment: $1,100.00

Calculation Steps

Calculate monthly savings: $1,243.33 - $1,100.00 = $143.33 per month
Divide closing costs by monthly savings: $3,500 / $143.33 ≈ 24.4 months

In this example, the break even point is approximately 24.4 months. This means you would need to keep the mortgage for about 2 years before the savings from refinancing cover the closing costs.

FAQ

What is the difference between a break even refinance and a traditional refinance?

A break even refinance focuses on the point where savings equal costs, while a traditional refinance aims to secure a lower interest rate regardless of the break even point. Both can save money, but the break even approach helps you determine financial viability.

How accurate is the break even calculation?

The calculation is accurate based on the assumptions you input. However, real-world factors like changes in interest rates, property value appreciation, or unexpected expenses may affect the actual break even point.

Can I use this calculator for a home equity line of credit (HELOC) refinance?

This calculator is designed for traditional mortgage refinancing. HELOC refinancing involves different calculations and considerations, so it's best to consult with a financial advisor for accurate results.