How to Calculate Mortgage Refinance Break Even Point

Refinancing your mortgage can save you money, but it's important to understand when it makes financial sense. The mortgage refinance break even point is the number of months after refinancing when the savings from the new loan equal the costs of refinancing. This guide explains how to calculate it and what it means for your finances.

What is a mortgage refinance break even point?

The mortgage refinance break even point is the time it takes for the savings from a new mortgage to cover the costs of refinancing. It helps you determine whether refinancing is worth the effort and fees.

Key factors that affect the break even point include:

The difference in interest rates between your current and new mortgage
Closing costs associated with refinancing
Your current loan balance
The length of your mortgage term

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

How to calculate mortgage refinance break even point

To calculate the mortgage refinance break even point, you'll need to know several key figures about your current mortgage and the potential new mortgage. Here's the step-by-step process:

Determine your current monthly payment and interest rate
Calculate the potential monthly payment and interest rate with the new mortgage
Note the closing costs of refinancing
Use the formula to calculate the break even point in months

The calculation involves comparing the savings from the lower interest rate with the upfront costs of refinancing.

The formula explained

The mortgage refinance break even point can be calculated using this formula:

Break Even Point (months) = (Closing Costs) / (Monthly Savings)

Where Monthly Savings = (Current Monthly Payment - New Monthly Payment)

This formula shows that the break even point depends on how much you save each month and how much you pay upfront to refinance.

Worked example

Let's look at an example to see how this works in practice.

Example Scenario

Current mortgage: $300,000 at 5% interest, 30-year term
Current monthly payment: $1,795.24
New mortgage: 4% interest, 30-year term
New monthly payment: $1,611.85
Closing costs: $5,000

Using the formula:

Monthly Savings = $1,795.24 - $1,611.85 = $183.39
Break Even Point = $5,000 / $183.39 ≈ 27.25 months

This means it would take about 27 months (2.25 years) for the savings from the lower interest rate to cover the $5,000 in closing costs.

Interpreting the result

The break even point helps you decide whether refinancing is financially beneficial. Here's how to interpret your result:

If the break even point is less than 5 years, refinancing is likely worth it
If it's between 5-7 years, consider other factors like your financial goals
If it's more than 7 years, refinancing may not be cost-effective

Remember that this calculation doesn't account for other factors like property value changes or tax benefits that might affect your decision.

Frequently asked questions

What is a good mortgage refinance break even point?

A good break even point is typically less than 5-7 years, depending on your financial situation. If it's longer than that, refinancing may not be cost-effective.

Does the break even point calculation include property taxes and insurance?

No, the basic break even point calculation focuses on the interest rate difference and closing costs. You may want to factor in other costs separately.

Can I use this calculator for FHA or VA loans?

Yes, the basic principles apply to all mortgage types, though specific rules and fees may vary. Always check with your lender for details.