What Is The Break-Even Point On A Mortgage Refinance? A Guide

Refinancing your mortgage can be an excellent way to save money. You can often lower your monthly payment and reduce your interest rate, which can save you thousands of dollars in the long run.

Before considering refinancing your loan, it’s important to have a specific objective in mind and to run the numbers to make sure your new loan can help you get there. One of the most important figures to look at is your break-even point, which can give you an idea of whether refinancing your loan is really worth it.

If you’re considering a refinance loan, keep reading to learn more about what a break-even point is, how to calculate it and how to use that information to decide whether refinancing is worth it.

What’s The Break-Even Point On A Refinance?

A break-even point is a term used in mortgage refinancing that refers to the point in your loan repayment when you’ll break even, meaning when your interest savings will surpass the money you spent on your new loan.

When you refinance your mortgage, you can often get a lower interest rate that saves you money, both on your monthly payment and in the long run. On the other hand, the new loan also requires closing costs, just like your original mortgage.

Assuming you qualify for a lower rate, you’ll eventually reach the point where your interest savings exceed your loan costs. However, because it can take many years to break even, the wait won’t be worth it for everyone.

How To Calculate Your Break-Even Point On A Refinance

Before you refinance your mortgage, it’s critical that you calculate your break-even point. Knowing this number will give you insight as to whether refinancing is really the right choice for you.

To calculate the break-even point on a mortgage refinance, add up all your costs and divide it by your monthly savings. Refinancing should save you money – but you’ll pay some upfront costs. We’ll go into more detail about this calculation in the next few sections.

1. Add Up All Your Refinancing Costs

The first step of refinancing your mortgage is adding up all of your refinancing costs. Just like other loans, refinance loans require closing costs. You can find your loan closing costs on the loan estimate your lender provides.

Here are a few closing costs you’re likely to pay:

• Application fee: Not always required, but some lenders charge to process your application.
• Origination/underwriting fee: A service fee imposed by lenders to cover the costs of originating the loan.
• Appraisal fee: Pays for the home appraisal, which is usually required for refinancing.
• Title fee: Though you already paid for title insurance, when you got your original mortgage, lenders require that you purchase a new policy when refinancing.
• Credit report fee: Pays for the credit report required to qualify for the new loan.
• Attorney fees: Applies if your state requires an attorney for your home closing.

2. Determine Your Monthly Savings

Next, compare your new monthly payment to your old one and calculate the difference. This calculation will help you determine your monthly savings.

For example, if you have a loan balance of $300,000 and can lower your interest rate from 7% to 6%, you’d have a monthly savings of $197.26, taking your monthly payment from $1,995.91 to $1,798.65.

3. Calculate The Break-Even Point

Once you know your total mortgage costs and your monthly savings, you can run the numbers to see how long it would take you to break even on your loan.

Let’s go back to our previous example, where you have a $300,000 mortgage and savings of $197.26 per month. If you have loan closing costs of $9,000, which is 3% of the loan balance, it will take you nearly 46 months – that’s nearly 4 years – to break even on your loan.

Example Break-Even Calculation:

Break-Even = Closing Costs ÷ Monthly Savings

• Loan Amount: $300,000
• Monthly Savings: $197.26
• Closing Costs: $9,000 (which is 3% of the loan balance)

Break-Even = 9000 ÷ 197.26 ≈ 45.62

Refinance Break-Even Example

We used an example of $300,000 with a starting interest rate of 7% and a refinance rate of 6%. To give you a better idea of how break-even points work, we’ve put together a table to show you how different interest rates will affect your break-even point, all using closing costs of $9,000, or 3% of your loan balance.

How Do You Know If A Refinance Is Worth It?

It’s one thing to calculate your break-even point, but a whole different thing to know what to do with that information. Your break-even point can be a valuable tool when deciding whether a refinance is worth it.

Let’s say you’re considering refinancing your home to save money on your monthly payments. You run the numbers and discover that your break-even point is 5 years. However, you don’t see this being a long-term home and think you’ll probably move before 5 years.

In that case, refinancing probably isn’t worth it since the money you’ll spend on your new loan will exceed the savings you’ll be able to enjoy before moving.

On the other hand, if you know you plan to be in the home for well over 5 years, then you can feel confident refinancing and knowing you’ll save money in the long run.

Of course, your break-even point isn’t the only factor to consider when deciding whether you refinance. There are several reasons someone might decide to refinance their loan, even if they don’t think they’ll eventually break even. For example, if you’re taking a cash-out refinance, there’s a good chance you’ll never break even, but that doesn’t make it a poor decision.

Another thing to consider is that if you’re refinancing to a lower interest rate, your monthly payment is likely to be higher, even if you have a lower interest rate. Your break-even point would suggest that refinancing is a poor decision, but you’ll actually save money in the long run.

It’s important to consider all of the pros and cons of refinancing your home loan to decide if it’s the right choice for you.

Tips To Accelerate Your Break-Even Point

As you’re preparing to refinance your loan, there are a few things you can do to accelerate your break-even point, helping you save even more money on your loan.

• Negotiate closing costs: Depending on your lender, loan type and financial situation, you may be able to negotiate lower closing costs or even get some closing costs waived.
• Opt for a shorter loan term: While a shorter loan term won’t accelerate your break-even point using the calculation we shared above, it will help you save more money on your refinance loan than you would with a longer-term loan. In addition to paying off your balance more quickly, a shorter loan term will also likely help you land a lower interest rate.
• Make extra principal payments: Making extra payments on your mortgage principal can also help you break even on your loan more quickly. The faster you pay down your loan, the less money you’ll pay in interest in the long run, which ultimately saves you money, even if you’re paying more each month.

The Bottom Line

Calculating your break-even point is one of the most important steps in refinancing your mortgage, especially if your goal is to save money on interest. However, it’s just one indicator of whether refinancing is the right choice for you. If you’re considering a mortgage refinance, start on an application today to see what interest rate you qualify for.