Learn the Simple Formula to Calculate Your Refinance Break-Even Point

Refinancing your home mortgage can reduce your monthly payment if your new refinance loan lowers your interest rate or lengthens your mortgage term. However, there are upfront costs to pay when you refinance. These costs usually total 2% to 5% of the amount you're borrowing.

You need to calculate your refinance break-even point, or the point at which your monthly savings from refinancing covers those up-front costs. This article explains why that's important and how to go through the process.

What Is a Refinance Break-Even Point?

If you are considering refinancing your mortgage, your refinance break-even point is the point in time when the money you save each month by lowering your payment adds up to enough to cover the closing costs that you paid when you took out the refinance loan.

Calculating your break-even point is important because you need to make sure you will reach that point before you plan to sell or refinance your home again. Otherwise, you could lose money by paying more closing costs than you recoup by lowering your payment.

How to Calculate Your Refinance Break-Even Point

There's a simple formula that you can use to calculate your refinance break-even point. To use the formula, you need to know two key numbers: the closing costs you pay to refinance and the monthly savings from refinancing your loan.

Once you know those numbers, here's how you do the calculation.

Refinance Break-Even Point Formula

You can find out your closing costs by looking at the loan estimate your lender provides, and you can calculate your monthly savings by subtracting your new estimated monthly mortgage payment from the current payment.

Once you have those two numbers, use the following formula to calculate your refinance break-even point.

Closing Costs / Monthly Savings = Number of Months to Break Even

For example, if you are paying $8,000 in closing costs and saving $225 on your monthly payment by refinancing, you'd divide $8,000 by $225 to find that you'll break even in 35.56 months.

Closing costs vary from lender to lender and include things like loan origination fees, appraisal fees, home inspection fees, attorney fees, and points that buy down your rate.

These costs may be negotiable, so explore your options to find an affordable loan.

Factors Affecting Your Refinance Break-Even Point

It's important to understand the key factors that affect your refinance break-even point. Those factors include the following:

• Closing costs: The higher your closing costs, the more you need to save when refinancing for it to make financial sense.
• Interest rate difference: The bigger the change to your interest rate, the more you will save each month and the faster you will break even.
• Loan term: A longer loan term will lower your monthly payment by a larger amount, so you'll make up for closing costs more quickly (but you may end up paying more interest over the life of the loan).

You can impact some of these factors by choosing a trusted lender with the most affordable refinance offers.

When to Refinance Based on Your Break-Even Point

Your break-even point will help you determine when you should refinance. If you expect to break even before you're likely to sell your home or refinance again, then refinancing probably makes sense. If it will take you a long time to break even and you aren't sure you'll keep the new loan for long enough, you probably should keep your current home loan to avoid losing money. Freedom Mortgage is always available to help you know exactly when and if refinancing saves you money and makes sense for you to reach your financial goals.

Refinance Break-Even FAQs

Still need to know more? Here are the answers to some frequently asked questions about the break-even point for refinancing.

What Is a Good Break-Even Period for a Refinance?

A good break-even period for refinancing depends on your personal circumstances.

If you don't plan to move or refinance within the next five (or more) years, a break-even period of two or three years would be good. You'd have several years of additional savings after covering the up-front costs. However, if you expect to move within two years, you probably would not want a refinance loan with a two or three-year break-even period, as you'd likely lose part of your assumed savings when you refinanced.

Why Should You Know Your Break-Even Point?

You need to know your break-even point before refinancing your mortgage so you can determine if refinancing will save you money in the long run. If the amount you save does not make up for the closing costs you'll pay, refinancing is probably not right for you.

Is Five Years Too Long for a Refinance Break-Even Point?

Five years can be a reasonable break-even point for a mortgage refinance loan if you plan to stay in the home for the long-term and if you do not plan to refinance your home loan again before the end of the five years.

How Does a No-Closing-Cost Refinance Change the Break-Even Point?

A no-closing-cost refinance can change the break-even point because you will not have up-front costs to make up for. It doesn't matter as much if you plan to stay in the home long-term. If you can save money each month by refinancing and pay nothing upfront to do it, then there's very little reason not to refinance. Just pay attention to total interest paid on the new loan and compare to your old to verify your savings.

Can You Reach the Break-Even Point Faster by Buying Points?

Buying points usually doesn't help you reach the break-even point faster because points increase your up-front closing costs.

When you buy points, you invest in reducing your interest rate. You essentially prepay interest in exchange for a lower rate over the loan’s term. This also makes sense if you plan to remain in your home and keep the loan for long enough for the savings from the lower rate to outgain the cost of buying the points.

Final Thoughts: Refinance Break-Even Point

If you're considering refinancing, make sure to calculate your refinance break-even point. You should also reach out to a mortgage loan professional to learn how much you can save, what your closing costs will be, and whether refinancing makes sense for you.

Contact Freedom Mortgage to get help exploring your options or to apply for a refinance today.