Calculate Break Even Point on Refinance

Determining the break-even point for refinancing your mortgage is crucial for making an informed financial decision. This calculator helps you calculate when refinancing becomes financially beneficial by comparing the costs and savings of your current mortgage with a potential new loan.

What is the break-even point on refinancing?

The break-even point on refinancing refers to the time it takes for the savings from a new mortgage to equal the costs of refinancing. This includes closing costs, points, and any other fees associated with obtaining a new loan.

Understanding this point helps you determine whether refinancing is worth the effort. If the break-even point occurs within a reasonable timeframe (typically 3-7 years), refinancing may be beneficial. If it takes much longer, you might want to consider other financial options.

How to calculate the break-even point

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

Break-even point formula

Break-even point (months) = (Refinancing costs) / (Monthly savings)

Where:

Refinancing costs = Closing costs + Points + Other fees
Monthly savings = Difference in monthly payments between current and new mortgage

To calculate the break-even point:

Determine your current mortgage payment and interest rate.
Estimate the new mortgage rate and payment.
Calculate the monthly savings from the new mortgage.
Add up all refinancing costs (closing costs, points, etc.).
Divide the total refinancing costs by the monthly savings to find the break-even point in months.

Key factors to consider

Several factors influence the break-even point for refinancing:

Interest rate difference: A lower interest rate will increase monthly savings.
Closing costs: Higher closing costs will increase the break-even point.
Loan term: Shorter loan terms may reduce the break-even period.
Current mortgage balance: A higher balance will increase monthly savings.
Credit score: A better credit score may qualify you for lower rates and lower closing costs.

Important note

The break-even point is an estimate and doesn't account for changes in interest rates, property values, or other factors that may affect your mortgage situation.

Example calculation

Let's look at an example to illustrate how to calculate the break-even point:

Factor	Current Mortgage	New Mortgage
Interest rate	6.5%	4.5%
Loan term	30 years	30 years
Loan amount	$250,000	$250,000
Monthly payment	$1,600	$1,300
Monthly savings	-	$300
Refinancing costs	-	$5,000

In this example:

The monthly savings from refinancing is $300.
The total refinancing costs are $5,000.
The break-even point is calculated as $5,000 / $300 = 16.67 months.

This means you would need to stay in the home for about 16.67 months to break even on the refinancing costs.

When to refinance

Refinancing may be beneficial if:

The break-even point is within 3-7 years.
You can secure a significantly lower interest rate.
You plan to sell the home within a short timeframe.
You want to change the loan term or type of mortgage.

However, you should avoid refinancing if:

The break-even point is longer than 7 years.
You can't secure a lower interest rate.
You're planning to stay in the home for less than 3 years.

Consult a professional

Before making a decision, consult with a financial advisor or mortgage professional to evaluate your specific situation and options.

Frequently Asked Questions

What is the typical break-even point for refinancing?

The typical break-even point for refinancing ranges from 3 to 7 years, depending on interest rate differences, closing costs, and other factors.

How do I know if refinancing is worth it?

Refinancing is worth it if the break-even point is within 3-7 years and you can secure a significantly lower interest rate. If the break-even point is longer or you can't secure a lower rate, refinancing may not be beneficial.

What are the costs associated with refinancing?

Common costs include closing costs (2-5% of the loan amount), origination fees, appraisal fees, and points. These costs can increase the break-even point.

Can I refinance with bad credit?

Yes, but you may face higher interest rates and closing costs. Specialized lenders or government programs may offer options for borrowers with less-than-perfect credit.

How often should I review my mortgage options?

It's a good idea to review your mortgage options annually or when significant life changes occur, such as a change in income, job, or family situation.