How to Calculate Refinance Break-Even

Refinancing your mortgage can save you money over time, but it's important to understand the break-even point - the time it takes for the savings to cover the costs of refinancing. This guide explains how to calculate the refinance break-even point and when it might make sense to refinance your mortgage.

What is Refinance Break-Even?

The refinance break-even point is the time period after which the savings from refinancing your mortgage will equal the costs of refinancing. It's calculated by comparing the total savings from refinancing with the total costs of refinancing, including closing costs and any points paid.

Key Point: The break-even point doesn't consider the interest rate savings alone - it includes all costs associated with refinancing.

For example, if you save $5,000 in interest over 5 years but paid $3,000 in closing costs, your net savings would be $2,000. The break-even point would be the time it takes for your savings to reach $3,000.

How to Calculate Refinance Break-Even

To calculate the refinance break-even point, you'll need to know:

The total savings from refinancing (difference in interest paid)
The total costs of refinancing (closing costs, points, etc.)
The monthly payment difference between your current and new mortgage

Formula: Break-Even Months = Total Refinancing Costs / Monthly Payment Difference

Here's a step-by-step breakdown:

Calculate the total savings from refinancing by comparing the interest paid over the life of both mortgages
Add up all refinancing costs (closing costs, points, appraisal fees, etc.)
Determine the monthly payment difference between your current and new mortgage
Divide the total refinancing costs by the monthly payment difference to get the break-even point in months

If the break-even point is less than the time you plan to stay in the home, refinancing may be worthwhile. If it's longer than your planned stay, you might be better off keeping your current mortgage.

Example Calculation

Let's say you're considering refinancing a $200,000 mortgage with a 5-year break-even point:

Item	Current Mortgage	New Mortgage
Interest Rate	6.5%	4.5%
Monthly Payment	$1,200	$900
Total Interest Paid	$180,000	$120,000
Refinancing Costs	$3,000	$3,000

In this example:

Total savings from interest: $60,000
Total refinancing costs: $3,000
Net savings: $57,000
Monthly payment difference: $300
Break-even point: $3,000 / $300 = 10 months

Since the break-even point is only 10 months, refinancing would make sense if you plan to stay in the home for at least that long.

When to Refinance

Refinancing can make financial sense in several situations:

When interest rates have dropped significantly since you originally took out your mortgage
When you have good credit and can secure a lower interest rate
When you need to access equity in your home
When you want to change the term of your mortgage (e.g., from 30 to 15 years)

Consideration: Always factor in the break-even point when deciding whether to refinance. Even if you save money in the long run, the costs of refinancing might outweigh the benefits if you plan to move soon.

Before refinancing, compare the break-even point with your planned stay in the home. If the break-even point is longer than your planned stay, you might be better off keeping your current mortgage.

FAQ

What is the difference between break-even point and payback period?

The break-even point is the time it takes for savings to equal the costs of refinancing. The payback period is the time it takes to recover the total costs of refinancing from the savings. They're related but not exactly the same.

How do I know if refinancing is worth it?

Compare the break-even point with your planned stay in the home. If the break-even point is shorter than your planned stay, refinancing may be worthwhile. Also consider other factors like access to equity and changes in interest rates.

What costs are included in refinancing costs?

Refinancing costs typically include closing costs (appraisal, title insurance, etc.), points (prepaid interest), and origination fees. Some lenders may also charge prepayment penalties if you refinance before a certain time.

Can I refinance if I have bad credit?

It's more difficult to refinance with bad credit, but not impossible. You may need to pay higher interest rates or closing costs, which could affect your break-even point. Consider working on improving your credit before refinancing.