Calculating Refinance Break Even

Refinancing your mortgage can save you money, but it's important to understand when the savings will make the effort worthwhile. The break-even point is the time when the cost of refinancing equals the savings you'll gain from the new loan. This guide explains how to calculate your refinance break even and what it means for your financial situation.

What is Refinance Break Even?

The refinance break even point is the time period after which the savings from refinancing your mortgage will cover the costs of the refinancing process. It's calculated by comparing the total cost of refinancing (including fees and closing costs) with the savings you'll gain from the new loan over time.

For example, if you refinance a $200,000 mortgage at a lower interest rate, you'll save money on interest payments. However, you'll also incur costs like appraisal fees, closing costs, and origination fees. The break even point is the time it takes for your savings to equal these costs.

Refinancing is typically worth it if the break even point is less than 5-7 years, depending on your financial situation and goals.

How to Calculate Refinance Break Even

Calculating your refinance break even involves several steps:

Determine your current mortgage balance and interest rate.
Estimate the new interest rate you could get with refinancing.
Calculate the monthly savings from the lower interest rate.
Add up all the costs associated with refinancing (closing costs, appraisal fees, etc.).
Divide the total refinancing costs by the monthly savings to find the break even point in months.

Break Even Point (in months) = Total Refinancing Costs / Monthly Savings

You can use our interactive calculator to perform these calculations quickly and accurately.

Factors Affecting Break Even

Several factors can affect your refinance break even point:

Interest rate difference: A larger difference between your current and new interest rate will increase your monthly savings.
Loan term: Shorter loan terms generally result in higher monthly payments but lower total interest paid.
Refinancing costs: Higher closing costs or fees will increase your total refinancing costs and push the break even point further out.
Current mortgage balance: A higher mortgage balance will generally result in higher monthly savings from refinancing.
Credit score: A higher credit score may qualify you for a lower interest rate, increasing your monthly savings.

Consider these factors when deciding whether refinancing is worth it for your situation.

Example Calculation

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

Scenario: You have a $200,000 mortgage with a 6% interest rate. You're considering refinancing to a 4% interest rate with $3,000 in closing costs.

Calculate your monthly payment with the current loan:

Monthly Payment = P * (r(1+r)^n) / ((1+r)^n - 1)

Where P = $200,000, r = 6%/12 = 0.005, n = 360 months

Current Monthly Payment ≈ $1,264.14
Calculate your monthly payment with the new loan:

New Monthly Payment ≈ $972.56
Calculate your monthly savings:

Monthly Savings = $1,264.14 - $972.56 = $291.58
Calculate the break even point:

Break Even Point = $3,000 / $291.58 ≈ 10.29 months

In this example, you would break even on your refinancing costs in about 10.3 months. This means that after making 10.3 months of payments with the new loan, the savings would cover the $3,000 in closing costs.

Frequently Asked Questions

What is a good refinance break even point?: A good refinance break even point is typically less than 5-7 years, depending on your financial situation and goals. If the break even point is longer than this, refinancing may not be worth it.
How do I calculate the total cost of refinancing?: To calculate the total cost of refinancing, add up all the fees and costs associated with the refinancing process, including closing costs, appraisal fees, origination fees, and any other fees charged by your lender.
Can I use the refinance break even calculator for different types of loans?: Yes, the refinance break even calculator can be used for different types of loans, including home equity loans, HELOCs, and other types of refinancing. However, you may need to adjust the inputs to account for the specific terms and conditions of the loan.
What factors can affect the accuracy of the refinance break even calculation?: Several factors can affect the accuracy of the refinance break even calculation, including changes in interest rates, unexpected closing costs, and changes in your financial situation. It's a good idea to review your calculations periodically and consult with a financial advisor if needed.
Is it always worth it to refinance based on the break even point?: While the break even point is an important factor to consider, it's not the only factor to consider when deciding whether to refinance. Other factors to consider include your financial goals, the current state of the housing market, and your overall financial situation.