If you’re a homeowner, you’ve probably heard the term refinancing thrown around a few times, but how do you know if it’s a smart move for you?
Well, if rates start dropping below your current mortgage rate, it may be a good time to refinance so you don’t miss out on those lower rates*. However, there are other things to consider when deciding if this is right for you.
One is using a refinance break-even point calculation. This will help show you how refinancing actually stacks up with your future plans and if you’ll be able to see the savings** refinancing can bring. Sound interesting? Let’s dive in!
*For qualified borrowers. Additional restrictions apply. Reach out to a loan officer for more information. **For qualified borrowers. By refinancing your existing loan, your total finance charges may be higher over the life of the loan.
What exactly is the mortgage break-even point?
This is the point when the money you save each month from refinancing equals the amount you spent to refinance, aka your closing costs and fees. After you reach this point, all future savings become actual financial benefits. It’s basically how long it takes for the refinancing to “pay for itself.”
This calculation can help you decide if refinancing is beneficial for your own personal goals and how long you need to stay in your home to potentially see savings.
Factors that influence the break-even point
Now that we’ve covered what the “break-even” point is, let’s talk about some factors that can impact this point.
Possible refinance costs
When refinancing, there are a few costs to keep in mind. Some lenders may charge application and origination fees to cover the cost of processing your loan. Depending on your situation, additional costs and fees may apply; you may also need an appraisal or have to cover attorney fees.
Interest rate reduction
The size of the rate drop influences how quickly your savings will accumulate. Typically, the larger the rate reduction, the more quickly you can save. So, if the rate reductions are smaller, it might take longer to see those savings.
Loan term
The length of your loan term affects how quickly you can break even. With a shorter loan term, you typically save more on interest each month, helping you reach the break-even point faster. On the other hand, with a longer loan term, your monthly savings may be smaller, which means it could take longer to reach the break-even point.
How long you plan to stay in the home
It’s important to stay in your home long enough to be able to break even and start to see the savings. So, one of the most critical factors in deciding whether to refinance is how long you plan to stay in your home.
If you decide to sell or move before reaching the break-even point, you won’t fully regain the costs of refinancing. For example, if your break-even point is three years but you plan to move out in two years, refinancing might not be the best option.
How to calculate the break-even point
But how do you even figure out what your break-even point is? Don’t worry; we’ve got you covered! Let’s take a look at the steps:
- Determine your closing costs: First, add up all the fees involved in refinancing. These can include but are not limited to your lender fees, appraisal costs, title insurance and any other closing costs you may have. This will be the total amount you need to recover through savings.
- Calculate your monthly savings: Second, you will need to subtract your new monthly mortgage payment (after refinancing) from your old mortgage payment. This will be how much you’ll save each month. (But don’t worry about doing the math yourself; check out this refinance calculator to easily calculate how much you could save!)
Overall, you’re using the simple formula of total closing costs divided by your monthly savings to find your break-even point.
For example, if you have $4,500 in closing costs and would save $357 on your monthly payment, you would calculate the break-even point like this:
Break-Even Point = $4,500 / $357 = 12.6 months*
This means it will take approximately 12.6 months to recoup your refinancing costs. If you plan to stay in your home beyond this period, refinancing could be beneficial. For a personalized calculation based on your specific situation, visit our Refinance Calculator. This tool will help you determine your break-even point and assess whether refinancing makes sense for you.
*Data is hypothetical and for example purposes only. Reach out to a loan officer for your specific situation.
Think refinancing might be right for you?
So before you jump right into refinancing or decide it’s just not for you, it’s important to understand your mortgage break-even point. This way, you can feel confident in your choice when you consider refinancing.
Ready to start the refinancing process? Reach out to Movement loan officer Brad Kelly to discuss your options!
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