How Do I Calculate a Breakeven Point on a Refinance?
The question arises often on whether it makes sense to refinance and specifically is there value especially having to pay closing costs. This article will detail out whether there is merit in refinancing your mortgage.
Typically, the simplest way to illustrate a breakeven point is a simple reduction in interest rate from a higher interest rate to a lower current market rate and keeping the same mortgage term.
You first take the amount of closing costs you will be paying which would include points, lender closing fees and 3rd party fees such as the appraisal, credit report and title company fees divided by the reduction in your monthly principal and interest payment to determine the number of months it would take to recoup the expense.
As an example, if you were paying $3000 in closings costs and your payment was being reduced by $75 per month due to the lower interest rate your breakeven point would be 40 months ($3000/75). So, after 3 years and 4 months you would break even and reap the benefit of the mortgage transaction.
As a homeowner if you plan on being in the home for longer than 40 months than it would make financial sense to refinance.
A refinance which includes debt consolidation results in a different analysis. In this scenario you should review how much you are paying monthly with the current mortgage along with the debt you are paying off and compare it the new mortgage payment. This is more of a cash flow analysis and can be very powerful on improving your financial situation.
As always, please consult with your experienced Loan Officer at Hall Financial to receive the best financial advice.