How to Calculate Break Even Point for Refinance

Refinancing your mortgage can save you money, but it's important to understand when the savings will cover the costs of refinancing. The break even point is the point at which the savings from refinancing equal the costs of refinancing. This guide explains how to calculate the break even point for refinancing and what it means for your finances.

What is the Break Even Point for Refinance?

The break even point for refinancing is the time period after which the savings from refinancing will cover the costs of refinancing. It's calculated by dividing the total refinancing costs by the monthly savings from refinancing.

For example, if you spend $5,000 to refinance your mortgage and save $100 per month on your mortgage payments, your break even point would be 50 months. This means that after 50 months, the savings from refinancing will have covered the costs of refinancing.

Understanding the break even point helps you decide whether refinancing is worth it. If the break even point is longer than the expected time you'll stay in your home, refinancing might not be the best option. If the break even point is shorter than the expected time you'll stay in your home, refinancing could save you money in the long run.

How to Calculate Break Even Point for Refinance

Calculating the break even point for refinancing involves a few simple steps:

Determine the total refinancing costs. This includes closing costs, appraisal fees, and any other fees associated with refinancing.
Calculate the monthly savings from refinancing. This is the difference between your current mortgage payment and your new mortgage payment.
Divide the total refinancing costs by the monthly savings to find the break even point in months.

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

For example, if you spend $5,000 to refinance your mortgage and save $100 per month on your mortgage payments, your break even point would be 50 months.

You can use our calculator on the right to calculate the break even point for your specific refinancing scenario.

Example Calculation

Let's walk through an example to illustrate how to calculate the break even point for refinancing.

Scenario

Current mortgage payment: $1,500 per month
New mortgage payment after refinancing: $1,200 per month
Total refinancing costs: $5,000

Step 1: Calculate Monthly Savings

Monthly savings = Current mortgage payment - New mortgage payment

Monthly savings = $1,500 - $1,200 = $300 per month

Step 2: Calculate Break Even Point

Break even point (months) = Total refinancing costs / Monthly savings

Break even point = $5,000 / $300 = 16.67 months

This means that after approximately 16.67 months, the savings from refinancing will have covered the costs of refinancing.

Note: The break even point is calculated in months, but you can convert it to years by dividing by 12. In this example, the break even point is approximately 1.39 years.

Key Factors Affecting Break Even Point

Several factors can affect the break even point for refinancing, including:

Refinancing costs: Higher closing costs and fees will increase the break even point.
Monthly savings: Larger savings from refinancing will decrease the break even point.
Interest rate: A lower interest rate can lead to larger savings and a shorter break even point.
Loan term: A longer loan term can lead to larger savings and a shorter break even point.
Home value: A higher home value can lead to larger savings and a shorter break even point.

Consider these factors when calculating the break even point for refinancing. You can use our calculator to adjust these variables and see how they affect the break even point.

FAQ

What is the difference between the break even point and the payback period?: The break even point is the time period after which the savings from refinancing will cover the costs of refinancing. The payback period is the time period after which the total savings from refinancing will equal the total costs of refinancing.
How accurate is the break even point calculation?: The break even point calculation is an estimate and assumes that your mortgage payment will remain the same after refinancing. In reality, your mortgage payment may change due to factors such as property taxes, insurance, and market conditions.
Should I refinance if the break even point is longer than the expected time I'll stay in my home?: If the break even point is longer than the expected time you'll stay in your home, refinancing might not be the best option. However, you should also consider other factors such as the interest rate, loan term, and refinancing costs.