Want to Refinance? What to Know About Your Break-Even Point

What Is the Break-Even Point?

The point at which you break even on any transaction is when you recoup the initial costs. In a mortgage refinance, these costs are usually in the form of closing costs and other associated fees. The savings from refinancing are generally the difference between what your old monthly payment was and what your new payment is. 



As with any use of credit, the sooner you pay off an expense (in this case, the cost of refinancing), the more money you save. And the more you save, the better an investment it usually is. 

How Do You Calculate the Break-Even Point?

Before choosing to refinance, you may want to figure out your break-even point. The simplest calculation is when you opt for the same payoff date as your old mortgage. In this case, you might divide the closing costs by the amount saved each month. If your costs were $3,000 and you save $200 per month, your break-even point is 15 months. Within 1 1/4 years, you have recouped your investment. 



However, the break-even point is more complicated when you change the loan terms. Changing from a 20-year mortgage to a 15-year loan? Your monthly payments may not even go down. In this case, the borrower can find the break-even point using an alternate method — calculate the overall interest savings over the life of the new loan. If you will save $100,000, the average break-even point for $4,000 closing costs is 25 months. 

What is the Ideal Break-Even Point?

The right break-even point for your mortgage depends on several factors. While the fewest amount of months is best, you should at least ensure that you will break even before you plan to sell the home. Some experts suggest aiming for less than 24 months, which is not only a reasonable investment of costs but also a period of time most homeowners can commit to staying in their home. 



The break-even point may not be the defining factor in your refinancing choice, of course. If your goal is to reduce the length of payments, for example, you might focus more on the reduced obligations and interest saved at the end of the loan's life. The break-even point is, in this case, just one piece of the puzzle and can help you gauge how large your overall savings can be. 

How Can You Affect the Break-Even Point?

Want to get the best results in your break-even calculations? The best way is to shop around for a refinance option that offers the largest interest rate savings or the lowest closing costs. Enough savings in just one of these categories can be enough to reduce the number of months to break even. Alternately, you might finance a lower amount or reduce your cash-out expectations to make the loan more cost-effective. 

Where Can You Learn More?

Find out more about closing costs, break-even points, and refinancing options by talking with the lending experts at Secure One Capital. We will work with you to get all the information you need to make the wisest choice for your family finances. Call today to get started.