There are many reasons why you might consider a mortgage refinance. You may want to switch from a variable-rate to a fixed-rate mortgage, you may wish to reduce your monthly payment, or you may be looking to use some of the equity in your home for improvements.
One of the most important steps you can take when you are deciding whether or not refinancing is right for you—especially if you’re looking to lower your monthly payment by reducing your interest rate—is to run a Refinance Break-Even Analysis.
Definition Of A Refinance Break-Even Analysis
The Refinance Break-Even Analysis is will help you determine at which point the amount saved each month will outweigh the cost of refinancing. Even if your mortgage has no out-of-pocket costs and you are rolling the refinance expenses into the new loan, you’ll want to run your Refinance Break-Even Analysis to ensure you’re making the best decision.
The Calculations
The analysis is relatively straightforward once you know all of the components. The analysis is two simple calculations.
Calculation One
Your Current Monthly Payment – Your Proposed New Monthly Payment = Total Monthly Savings
Calculation Two
The Cost of Your Refinance / Total Monthly Savings = Number of Months to Break-Even
In order to run the analysis, you need to know three main numbers:
- The Cost of Your Refinance
- Your Current Monthly Payment
- Your Proposed New Monthly Payment
Once we know these three numbers, you simply put them into the calculation above. Let’s run a sample calculation so you can see how it works.
Example Of An Analysis
Steve and Linda are considering refinancing their home to lower their monthly payment. Their current monthly payment is $1,500 and, with how low interest rates are today, their proposed new monthly payment will be $1,350. They’ve also spoken to a loan originator who has estimated their total cost to refinance is $5,500. So, in this example we know our three numbers. They are:
- The Cost of Their Refinance – $5,500
- Their Current Monthly Payment – $1,500
- Their Proposed New Monthly Payment – $1,350
Now, we simply take their numbers and enter them into the two calculations:
$1,500 (Current Payment) – $1,350 (Proposed New Payment) = $150 (Total Monthly Savings)
$5,500 (Cost to Refinance) / $150 (Total Monthly Savings) = 36.67
So, we can see that it will take Steve and Linda just under 37 months before their monthly savings outweighs their cost to refinance. If they moved before their 37-month break-even point, they would never actually save any money. In fact, it will cost them even more than if they did nothing at all!
Now you understand why it is so important to run a Refinance Break-Even Analysis before you make the decision to refinance your current mortgage. Our experienced team of loan originators is here for you should you have any questions on refinancing your mortgage or would like some assistance in computing your Refinance Break-Even Analysis.