How to calculate the break-even point on a mortgage refinance
Quick insights
- The break-even point is a key metric in mortgage refinancing that shows when the costs of refinancing are offset by the savings.
- You can calculate this point in time by dividing total closing costs by monthly savings.
- Influenced by the loan terms, including closing costs, the break-even point can help you decide if or when to refinance your mortgage.
Refinancing your mortgage may feel like solving a financial puzzle. To help you decide if a new loan makes sense, you can calculate your break-even point. This is the moment your new monthly savings cover the upfront costs of the loan. While many factors are important, the break-even point shows exactly how long it takes for the refinance to benefit you. Remember, your actual results will always depend on your unique financial situation.
Defining the break-even point
Your break-even point is the moment when your savings equal the total refinancing costs. This number can help you decide if getting a new mortgage loan makes sense financially. The break-even point allows you to weigh the financial benefits of refinancing against the expenses. If it takes too long to break even, refinancing might not be worth your money. However, a shorter break-even time might make the new loan a good choice.
Calculating the break-even point
Finding your break-even point shows how long it takes for your savings to cover your upfront costs. Follow these steps to find your number.
1. Add up your costs
First, find the total cost of refinancing your mortgage. This includes lender fees, an appraisal, title costs and other closing costs. For example, let’s say your total costs are $5,000.
2. Estimate your monthly savings
Next, compare your current mortgage payment to your new one. The difference is your monthly savings. If your new payment is $200 less, you save $200 each month.
3. Do the math to find when you break even
Now, divide your total costs by your monthly savings.
Break-even point = Total closing costs / monthly savings
Using our example, divide $5,000 by $200. This equals 25 months. It will take you just over two years to break even. You can also use an online calculator to check your math.
$5,000 / $200 = 25 months
You can also use a mortgage refinance calculator to estimate your break-even point and compare different refinancing scenarios.
4. Compare the results to your plans
Finally, think about how long you plan to keep your home. If you move or sell the property before you break even, refinancing might not be helpful, financially speaking. Remember, your actual numbers will vary, and you can speak with a Home Lending Advisor to review your options.
These figures are provided solely for educational purposes. Consult with a lender for specific terms.
Factors that could affect the break-even point
There are several elements that may influence when, or if, you reach your break-even point. Each borrower’s situation is different, but here are some useful considerations:
- Closing costs: Refinancing often comes with fees, such as appraisal, title or lender charges. Higher closing costs might extend the time it takes to break even, while lower costs could shorten it.
- Interest rate changes: A lower interest rate may reduce your monthly payment, possibly helping you reach your break-even point sooner. However, if the rate difference is small, the savings might take longer to cover the upfront expenses.
- Loan term: Extending your mortgage term could reduce your monthly payments but might also delay your break-even point. Shortening your term means higher monthly mortgage payments, but the interest savings might offset costs faster.
- How long you plan to stay in the home: If you might sell or move in a few years, you may not reach the break-even point.
- Extra payments or prepayments: Making additional payments could help you reach your break-even point more quickly. However, this depends on your overall financial goals and flexibility.
Break-even point for cash-out refinancing
A cash-out refinance changes your break-even math because you take cash out of your home’s value. Your costs, benefits, and timeline will shift based on how you spend that money. Let’s explore a few things to keep in mind:
- Higher loan balance: Borrowing more money can increase your monthly payments. This will push your break-even point further into the future. For example, imagine your current mortgage is $200,000. If you take out $50,000 in cash, your new loan becomes $250,000. Even with a lower interest rate, your monthly payment might go up. Because of this, it will take longer to cover your upfront costs.
- Interest rate impact: A lower interest rate may help offset costs, while a higher rate might delay savings.
- Use of funds: How you use the cash (home improvements, debt consolidation or other expenses) might influence whether the refinance feels worthwhile.
- Time in your home: Staying long term could make a cash-out refinance more beneficial, whereas a short-term stay might not allow enough time to break even.
Cash-out refinancing may not be suitable for everyone. It’s important to review your financial objectives and consult with a mortgage professional.
In summary
The break-even point can be a helpful guide when thinking about mortgage refinancing. There are various factors that could influence your timeline, like closing costs, interest rate changes and how long you plan on staying in the home. Reviewing the numbers, considering your long-term plans and speaking with a Home Lending Advisor might help you decide whether a mortgage refinance could be the right move for you. Individual results will vary.
