Published June 17, 2024

Should You Refinance Your Mortgage? How To Calculate Your Break-Even Point On A Refinance

Written by The Norman Home Team of Keller Williams Gateway

Should You Refinance Your Mortgage? How To Calculate Your Break-Even Point On A Refinance header image.

Refinancing your mortgage can be a tempting option, especially with fluctuating interest rates and the hope for lower rates to come. But before you dive in, do you understand the true cost of refinancing and how long it will take to recoup those costs? This is where the break-even point comes in. It tells you how many months it will take for the monthly savings from your new loan to offset the upfront refinancing fees.

Here's a breakdown on how to calculate your break-even point:

1. Adding Up All the Refinancing Costs

Refinancing isn't free. There are various closing costs associated with the process, including:

Application fee: Some lenders charge a fee to start the process
Origination fee: A percentage of the loan amount charged by the lender for processing the application.
Appraisal fee: The cost of getting a professional appraisal of your home's current value.
Title search and insurance: Fees to ensure the property title is clear and to protect the lender's interest.
Recording fees: Government charges to register the new mortgage.
Escrow fees: Charges for handling property taxes and homeowners insurance.

Tip: Don't forget to factor in any points you might buy to lower your interest rate. Points are essentially prepaid interest, and they add to your upfront costs.

Gather all your closing cost estimates from your lender and add them together. This total sum represents the upfront financial investment you'll make to refinance.

2. Determine the Monthly Payment Savings

Compare your current monthly mortgage payment to the estimated payment on your new refinanced loan. The difference between these two figures is your projected monthly savings.

If your current loan amount owed is $250,000 and your interest rate would go from 7% to 6%, the savings would be $2500 for the year or $208 each month.

3. Calculate the Break-Even Point

Here comes the magic formula: Divide the total refinancing costs (from step 1) by your monthly payment savings (from step 2). The resulting number represents the number of months it will take to break even on your refinancing costs. In simpler terms, this is how long it will take for the monthly savings to outweigh the upfront investment.

For example, let's say your total refinancing costs are $5,000 and your monthly payment savings are $200. Using the formula:

$5,000 (costs) / $200 (savings) = 25 months

This means it would take 25 months to recoup the $5,000 in refinancing costs. After that 25-month mark, all the monthly savings become pure profit.

Remember: The break-even point is just one factor to consider when deciding to refinance. You should also factor in:

How long you plan to stay in your home: If you plan to move within a few years, refinancing might not be worthwhile.
Your current interest rate: Only refinance if the new rate is significantly lower than your existing one.
Your financial goals: Refinancing can free up monthly cash flow, but make sure it aligns with your overall financial plans.

By calculating your break-even point and considering these other factors, you can make an informed decision about whether refinancing is the right move for you.

If you're thinking about buying or selling and would like a no-obligation consult to see how we can serve you, contact The Norman Home Team at 443.489.5225! Visit our website for information on all the services we provide We look forward to hearing from you and helping you achieve your goals