The Break-Even Point

After all of the considerations made by borrowers in deciding whether or not to refinance, what it really all boils down to is a simple question. How long will it take, before you start saving money? Theoretically, this is easy to calculate.

First, start with the amount you will save when you lower your monthly payment. Add up all the costs associated with refinancing, and divide this number by your monthly savings. The number this calculation reveals is the number of months that will pass before you reach the break-even point.

Here is an example: If a borrower wants to refinance to lower his or her payments from $1,000 to $800, saving $200 per month, and their costs of refinancing add up to $5,000:

$5,000 / $200 = 25 months before the borrower will see the savings.

Break even points depend on other factors as well, including tax situation and whether closing costs are paid upfront or added to the new mortgage principal. There are variables to consider when choosing whether or not to refinance, and the Break-Even point is definitely one variable worth looking at.