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In short, a mortgage refinance break-even point is dividing the sum of all expenses towards a new loan by the total amount of savings.

In short, a mortgage refinance break-even point is dividing the sum of all expenses towards a new loan by the total amount of savings.

This explanation shows you the importance of break-even points in resetting your home loan. So, figuring out when you are breaking even takes up a whole new significance. I mean, lenders guess the financial wisdom (and intentions!) of their customers by this simple point. You can see how staying ahead in the game can suddenly become very complex indeed! It is as if your challenger is giving you a weapon asking you to use it to the best of your ability. Without thinking of break-even points, it is futile to get a good idea on when and how much you will save on a new loan.

Take the first important step: Be aware of when you are breaking even. Then you can calculate exactly how much you will end up saving in the end. First…

Determine the Reason you are Resetting your Home Loan

Home owners attracted to a refinance can have only one of two major reasons. One is they want to own clear tittle earlier and be free of debt. The other is saving money either in the present or long term. What is your main reason?

Anyways, restructuring a home mortgage loan involves expenses, which you need to justify. A break-even point justifies whether your reason for mortgage refinance is viable. As simple as that.

So, it is important to know how long it will take you for breaking even on a reset loan. You have to recoup your expenses before you can take any step. However, people have one good reason to refinance for ‘savings’. Their property is appreciating fast and they intend to sell it in the near future at a huge profit – much more than their expenses for refinancing. In such cases, lower monthly payments give them immediate savings plus they will be making profit on their property sale. But in such cases, lenders may not be agreeable to resetting your loan and may need some convincing.

Talking about the more honest home owners, we come to those that NEED money without jeopardizing their current home. Here, the two main reasons mentioned initially come into play and the break-even point gains significance. In the end, in view of above scenario, financially sound decisions are really about why you are refinancing. Are you jumping ship, trying to ease financial distress or simply want to own your house early?

Jared Maxwell, vice president at Embrace Home Loan, agrees, “Calculate the fees and closing costs then divide them by total savings to arrive at your break-even point.” Moreover, he also emphasizes, “It really starts with the question, ‘Why are you refinancing?’”

Are you looking to?

  • lower your monthly payment
  • shorten the loan term and reduce the interest you pay over the life of loan
  • cash-out refinance to tap home equity
  • refinance to eliminate mortgage insurance premiums

Home owners should realize that there is no general rule of thumb that can either prevent them or push them into mortgage refinance. Joshua Askins, Texas regional mortgage sales manager for BBVA Compass, says forget rules of thumb simply because every situation is different.

Compiling Costs to Refinance

  • Bank fees: origination or application fees and any points charged
  • Title costs: title search and insurance
  • Third-party costs: appraisal or attorney’s fees or cost of credit report
  • Escrow charges: taxes, insurance, etc.

Shopping around and applying with more than one lender to save on refinance expenses is a good idea.

An example to calculate break-even point:

30-year mortgage refinanced without extending term, to lower payments by $100 at cost of $3,000 will have a break-even point of 30 months. Extending the term to gain lower payments means paying extra interest. Maybe no savings in the end.

Going Beyond Breaking Even and Considering Other Factors

Multiply your savings beyond break-even point by resetting to fewer years. You own a free-of-debt house sooner. Save Big.

Consider “forever” home or “just for now” reasons. It will affect how much a break-even point makes financial sense.