How to Calculate Break Even Point Refinance

What is Break Even Point Refinance?

The break-even point for refinancing is the time period after which the savings from refinancing your mortgage outweigh the costs of refinancing. It's calculated by comparing the total cost of refinancing (including fees and closing costs) with the savings from the lower interest rate.

For example, if you refinance a $200,000 mortgage at a lower rate but pay $3,000 in closing costs, the break-even point is the number of months it takes for the savings from the lower rate to cover the closing costs.

How to Calculate Break Even Point Refinance

To calculate the break-even point for refinancing, follow these steps:

1. Determine the total cost of refinancing, including closing costs and fees.
2. Calculate the monthly savings from the lower interest rate.
3. Divide the total refinancing cost by the monthly savings to find the break-even point in months.

The result tells you how many months you need to stay in the refinanced mortgage to recover the costs. If the break-even point is less than the expected time you'll stay in the home, refinancing makes financial sense.

Factors Affecting Break Even Point

Several factors can influence the break-even point for refinancing:

• Closing costs and fees: Higher closing costs increase the break-even point.
• Interest rate difference: A larger difference between the old and new rate reduces the break-even point.
• Loan term: Shorter loan terms generally have lower break-even points.
• Home value appreciation: If your home appreciates, the break-even point may decrease.

Example Calculation

Let's say you're refinancing a $200,000 mortgage with the following details:

• Original interest rate: 6%
• New interest rate: 4%
• Loan term: 30 years
• Closing costs: $3,000

First, calculate the monthly savings from the lower rate:

• Original monthly payment: $1,264.14
• New monthly payment: $1,002.08
• Monthly savings: $262.06

Next, calculate the break-even point:

This means it will take about 11.45 months for the savings from the lower rate to cover the $3,000 in closing costs.

When to Refinance

Refinancing makes sense if:

• The break-even point is less than the expected time you'll stay in the home.
• You can secure a significantly lower interest rate.
• You plan to stay in the home for a long time.

However, refinancing may not be worth it if:

• The break-even point is longer than the expected time you'll stay in the home.
• Closing costs are high relative to the savings.
• You're planning to sell the home soon.