Calculating Mortgage Refinance Break Even

Determining when a mortgage refinance will break even is crucial for homeowners evaluating whether to refinance. This guide explains the calculation process, key factors to consider, and provides a practical example to help you make an informed decision.

What is a Mortgage Refinance Break Even?

The mortgage refinance break even point is the time at which the total cost of refinancing equals the total savings from the new mortgage terms. It's calculated by comparing the costs of refinancing (closing costs, points, etc.) with the savings from lower interest rates or a shorter loan term.

Understanding this point helps homeowners decide whether the financial benefits of refinancing will outweigh the upfront costs within a reasonable timeframe.

Refinancing may not always be beneficial. Even if the break even point is reached, other factors like property value appreciation or changes in interest rates should be considered.

How to Calculate Mortgage Refinance Break Even

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

Break Even Months = (Refinance Costs) / (Monthly Savings)

Where:

Refinance Costs - Total upfront costs of refinancing (closing costs, points, etc.)
Monthly Savings - Difference between monthly payments on the new mortgage and the old mortgage

The calculation assumes that the homeowner will keep the property for the entire period until the break even point is reached.

Key Factors to Consider

Several factors influence the mortgage refinance break even calculation:

Factor	Impact
Interest Rate Difference	Larger differences between old and new rates lead to faster break even points
Loan Term	Shorter loan terms typically result in higher monthly payments and faster break even
Closing Costs	Higher closing costs increase the total refinance costs and delay the break even point
Property Value	Appreciating property values can offset some of the refinance costs

It's important to consider these factors when evaluating whether refinancing is financially beneficial.

Example Calculation

Let's consider a homeowner with the following details:

Current mortgage: $300,000 at 5% interest, 30-year term
New mortgage: $300,000 at 4% interest, 15-year term
Refinance costs: $5,000 (closing costs and points)

First, calculate the monthly payments for both mortgages:

Current monthly payment: $1,762.44
New monthly payment: $2,333.33

Monthly savings: $2,333.33 - $1,762.44 = $570.89

Break even months: $5,000 / $570.89 ≈ 8.76 months

This means the homeowner would break even on the refinancing costs after approximately 8.76 months.

In reality, the break even point might be different due to changes in interest rates, property value, or other factors not accounted for in this simple example.

FAQ

Is refinancing always a good idea?

No, refinancing should only be considered if the break even point is within a reasonable timeframe and other financial benefits outweigh the costs. It's important to consider all factors before making a decision.

How do property taxes affect the break even calculation?

Property taxes are typically not included in the standard mortgage payment calculation. If they are higher with the new mortgage, they should be factored into the monthly savings calculation.

What if interest rates change after refinancing?

Changes in interest rates after refinancing can affect the break even point. It's important to monitor market conditions and consider the potential impact of rate changes on your financial situation.

Should I consider property value appreciation when calculating break even?

Yes, property value appreciation can offset some of the refinance costs. However, it's important to consider both the potential appreciation and the risk of depreciation when making your decision.