What Is the Break-Even Period?
When looking at a mortgage refinance, it’s important to know what your break-even period is. The break-even period is the number of months that it takes for you to earn back the fees spent to refinance the loan. You’ll need to consider how long you plan to stay in your home to determine if the refinance is best for you.
Mortgage Break-Even Calculation Example
The basic equation is to take the refinancing fees and divide them by the total monthly savings.
Refinancing Fees / Monthly Savings = Number of Months to Recoup the Cost of Refinancing
For example, if your refinancing fees are $4,000 and you will save $175/month on your new payment:
$4,000.00 / $175.00 = 23 months
In this example, 23 months would be your break-even period – the amount of time it takes to recoup the refinancing fees. Every month beyond this will be cost savings to you!
When to Consider a Shorter-Term Loan:
You can also choose to shorten your term when you refinance in exchange for an even lower interest rate. In this case your monthly payment may go up, but you could save thousands of dollars in interest over the life of the loan.
Let’s say that 5 years ago you borrowed $200,000 at 4.25% on a 30-year mortgage and your payments are $984 per month. You are considering a refinance to a 15-year mortgage at 2.65% and the payments will be $1,224 per month. In this scenario you will save THOUSANDS in interest costs by refinancing, however your monthly payment will go up by $240. Is this worth it? It depends on your personal cash flow. If you can easily make the increased payment it will benefit you long-term to refinance at the lower rate.