Calculate Break Even on Refinance

Determining the break even point on refinancing is crucial for homeowners considering a mortgage refinance. This calculator helps you calculate when refinancing becomes financially beneficial by comparing the costs and savings of your current mortgage with the new refinanced terms.

What is Break Even on Refinance?

Break even on refinancing refers to the point at which the total savings from refinancing equal the costs associated with refinancing. This includes closing costs, points, and any other fees. The break even point is typically measured in months or years after refinancing.

Understanding your break even point helps you determine whether refinancing is worth the effort. If the break even occurs within a reasonable timeframe, refinancing may be beneficial. If it takes too long, you might be better off keeping your current mortgage.

How to Calculate Break Even on Refinance

The break even point on refinancing can be calculated using the following formula:

Break Even (months) = (Refinance Closing Costs + Points) / (Monthly Savings)

Where:

Refinance Closing Costs - The total fees associated with refinancing, including appraisal fees, title insurance, and other costs.
Points - The upfront fees paid to lower your interest rate, expressed as a percentage of the loan amount.
Monthly Savings - The difference in monthly payments between your current mortgage and the refinanced mortgage.

To calculate the break even point, you'll need to know your current mortgage details, the new refinanced terms, and the associated costs.

Factors Affecting Break Even on Refinance

Several factors can influence the break even point on refinancing:

Interest Rate Reduction - Lowering your interest rate can significantly reduce your monthly payments and shorten the break even period.
Loan Term - Shorter loan terms can lead to higher monthly payments but may result in a faster break even point.
Closing Costs - Higher closing costs can extend the break even period, making refinancing less attractive.
Current Mortgage Balance - A higher remaining balance on your current mortgage can increase the break even period.
Credit Score - A higher credit score may allow you to secure a lower interest rate, reducing the break even period.

Example Calculation

Let's consider an example to illustrate how to calculate the break even point on refinancing.

Suppose you have a current mortgage with a balance of $200,000, an interest rate of 6%, and monthly payments of $1,200. You're considering refinancing to a new interest rate of 4% with closing costs of $3,000 and points of 1% of the loan amount.

First, calculate the points:

Points = 1% of $200,000 = $2,000

Next, calculate the total refinancing costs:

Total Refinancing Costs = Closing Costs + Points = $3,000 + $2,000 = $5,000

Now, calculate the new monthly payment with the lower interest rate:

New Monthly Payment = PMT(4%, 30 years, $200,000) ≈ $965

Determine the monthly savings:

Monthly Savings = Current Payment - New Payment = $1,200 - $965 = $235

Finally, calculate the break even point:

Break Even (months) = $5,000 / $235 ≈ 21.3 months

In this example, refinancing would break even in approximately 21.3 months, meaning you would start saving money after this period.

When to Refinance Based on Break Even

Deciding when to refinance based on the break even point involves considering several factors:

Time Horizon - If the break even occurs within a few years, refinancing may be worth the effort.
Interest Rate Trends - If interest rates are expected to rise, refinancing now may be beneficial.
Personal Financial Situation - Consider your ability to handle closing costs and any potential risks.
Future Plans - If you plan to sell the home soon, refinancing may not be necessary.

If the break even point is within a reasonable timeframe, refinancing can provide long-term savings. However, if the break even occurs too far in the future, you might be better off keeping your current mortgage.

Frequently Asked Questions

What is the typical break even point for refinancing?

The typical break even point for refinancing ranges from 6 months to 5 years, depending on interest rate reductions, closing costs, and loan terms.

How do closing costs affect the break even point?

Higher closing costs can extend the break even period, making refinancing less attractive. Lower closing costs can shorten the break even period.

Can refinancing always save money?

Not necessarily. If the break even point occurs too far in the future or if interest rates are not significantly lower, refinancing may not be cost-effective.

What factors should I consider before refinancing?

Consider your current mortgage terms, interest rate trends, closing costs, credit score, and your personal financial situation before deciding to refinance.