How to determine the breakeven point on a mortgage refinance
Refinancing your home loan can be a smart and effective way to save money. It can also help you pay off your loan sooner and build equity faster. But refinancing does come with a few costs. Just like when you closed your mortgage, you will have to pay certain fees and closing costs when you get approved for a refinance loan. Nevertheless, the amount of money you will save by refinancing should (hopefully) outweigh the initial costs. The point at which the amount of money you spent on refinancing evens out with the savings is known as the break-even point.
The break-even point is different for everyone and is determined by a variety of factors. How long it will take for you to break even on your mortgage refinance could be affected by some or all of the following:
- The amount of the original mortgage
- Your original interest rate
- The original loan’s term (30, 20, 15 years…etc.)
- The interest rate on the new loan
- The new amount being financed
- Closing costs for the refinance
It can be daunting to try to calculate all of these separate factors on your own. Talk to your mortgage professional to find out when your break-even point would be. You may find that the first refinance option you consider will not offer you the quickest break-even point. You may also discover that getting the quickest break-even point is not necessarily the most profitable option for you.
If you are planning on staying in the home for the rest of the forseeable future, you may be more interested in the amount of money you’ll save over the life of the loan rather than hitting a break-even point quickly. That’s why your mortgage consultant may suggest other program options, depending on your situation and plans for the future. For instance, instead of refinancing your 30 year fixed rate loan to the same type of loan with a lower interest rate, your mortgage consultant may suggest refinancing to a 15 or 20 year loan to help you reduce your overall interest cost and pay off your mortgage debt faster.
On the other hand, if it is likely that you will move into a different home in the next 5-10 years, you will probably be more concerned with breaking even before that point.
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