Houston Refinance: Mortgage Break-Even Period

Break-Even Period

In an ideal world, we would not have to pay to refinance into a lower rate. However, in the real world, you would have to pay everybody that helps you get your loan finished. This cost is usually a big amount.

Some borrowers rush to refinance when the rate is low without calculating how much they are going to save and how long it will take for them to recoup the cost they are paying out. The “break-even” period is the time it takes for you to recover the cost to refinance through your monthly savings on the new loan.

Recouping your cost

For a refinance mortgage to make good financial sense, you need to remain in your house long enough to begin reaping the net rewards. Add up all the various charges, including lender’s fees, appraisals, title insurance, and legal fees. Once you know the grand total of your refinance costs, you’ll know how much you need to recoup to start realizing the savings. Before you can start saving from your refinance, you first have to pay yourself back for all those charges.

The more it costs to obtain the new loan, the longer the break-even period will be.

Let’s say your current monthly payment is $1500. If you can refinance to a new monthly payment of only $1300, you will receive monthly savings of $200. But if the total fees required to refinance add up to $3000, it will take you 15 months to recoup those fees.

 $3000 / $200 = 15 months

After 15 months, you will be saving $200 a month -> $2400 a year -> $24K over a decade.

Another factor in calculating the break-even period is if you change your loan term. If you refinance from a 30 year fixed into a 15 year fixed, you should add credit for paying off your loan in half the time. Even if your monthly payments after refinancing are the same or higher, it might still be the most cost-effective option, because you’ll have no monthly payments whatsoever after only 15 years. If you still have 25 years on your current loan, you’re essentially saving yourself 10 full years of interest payments. Those savings need to be included in your calculations.

If you are thinking about refinance, let me help you calculate your break-even period and see if it makes sense for you to refinance.

I’m a bilingual Texas loan officer who speaks Chinese/Mandarin and English. You can reach me at 512-919-0154.