How to Calculate Mortgage Refinance Break Even

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 time when the savings from the new mortgage equal the costs of refinancing. This guide explains how to calculate it and what it means for your financial situation.

What is a Mortgage Refinance Break Even?

The mortgage refinance break even point is the time period after which the savings from a new mortgage loan outweigh the costs of refinancing. These costs include closing costs, points, and any fees associated with the new loan. The break even point helps you determine whether refinancing is financially beneficial in the long run.

For example, if you refinance a $200,000 mortgage with $5,000 in closing costs and save $50 per month on your mortgage payment, the break even point would be when the savings cover the closing costs. This could take anywhere from a few months to several years, depending on the interest rate difference and other factors.

How to Calculate Mortgage Refinance Break Even

Calculating the mortgage refinance break even point involves several steps. Here's a step-by-step guide:

Determine the current mortgage balance and interest rate. This is your original loan amount and the interest rate you're currently paying.
Estimate the new interest rate and closing costs. Research current mortgage rates and factor in closing costs, points, and other fees.
Calculate the monthly savings. Subtract the new monthly payment from the old monthly payment to find out how much you'll save each month.
Calculate the break even point. Divide the total refinancing costs by the monthly savings to find out how many months it will take to recover those costs.

Formula: Break Even Months = Total Refinancing Costs / Monthly Savings

Use our interactive calculator to perform these calculations quickly and accurately.

Example Calculation

Let's say you have a $200,000 mortgage with a 5% interest rate. You're considering refinancing to a 4% interest rate with $5,000 in closing costs.

Calculate the original monthly payment: $200,000 × 0.05/12 = $833.33
Calculate the new monthly payment: $200,000 × 0.04/12 = $666.67
Monthly savings: $833.33 - $666.67 = $166.66
Break even point: $5,000 / $166.66 ≈ 30 months (2.5 years)

In this example, it would take about 2.5 years for the savings from the lower interest rate to cover the $5,000 in closing costs.

Key Factors Affecting Break Even

Several factors can influence the mortgage refinance break even point:

Interest rate difference: A larger difference between the old and new interest rates will result in greater monthly savings.
Closing costs: Higher closing costs will increase the break even point.
Loan term: Shorter loan terms generally result in higher monthly payments and faster break even points.
Current mortgage balance: A higher loan balance will lead to larger monthly savings and a faster break even point.

Consider these factors when deciding whether to refinance and how long it will take to recover the costs.

FAQ

What is the typical mortgage refinance break even point?

The break even point can vary widely, from a few months to several years, depending on the interest rate difference, closing costs, and other factors. Use our calculator to get a personalized estimate.

Can I refinance if the break even point is longer than I want to wait?

Yes, you can still refinance if the break even point is longer than you want to wait. The decision should consider not just the financial benefits but also other factors like access to lower rates, reducing your principal balance, or taking advantage of other loan features.

How do I know if refinancing is worth it?

Refinancing is worth it if the monthly savings outweigh the costs of refinancing, and if you plan to stay in the home for at least as long as the break even point. Consider consulting with a mortgage professional for personalized advice.