Breaking Even On Your Refinance

You can figure out your breakeven on a mortgage refinance quite easily. This lets you know if it makes sense to refinance.

Loan Factors:

Here are some basic mortgage loan expenses:

cash out
loan closing costs
new loan balance
new loan term in years
new interest rate
new monthly payment
monthly savings
Cash Out

This is the most basic factor to include. This is often a borrower's primary motive in doing a refinance.

Loan Closing Costs:

These are the closing costs for getting your new loan. These include lender charges as well as any prepayment penalties.

New Loan Balance:

This is the new loan balance you have after you add your old mortgage balance, additional cash taken out, and your closing costs.

New Loan Term In Years:

This is the time frame for your new loan. If you switch to a 50 year term your monthly payment may go down even though your total loan size has gone up. This is because the longer you take to pay a mortgage back the lower your monthly payment will be.

New Interest Rate:

This is the new interest rate you are being offered.

New Monthly Payment:

This is your new monthly payment. If you take a lot of cash out on your new loan you may end up with a higher monthly payemnt.

In this case, there is no "break even" because you have increased your monthly mortgage payment instead of decreasing it.

Monthly Savings:

This is the decline in your monthly payment. You can divide your monthly savings by your total closing costs to see how long it will take you to break even.

For example, if your monthly mortgage savings are $500 per month and your closing costs are $5,000 then you will break even in 10 months ($5,000 closing costs divided by $500 per month in savings).