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Mortgage Refinancing: When Will You Break Even?

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The decision whether or not mortgage refinancing makes sense in your situation may be as simple as determining the break even point. Your break even point is the amount of time it will take you to realize a savings after recouping the expenses of refinancing your mortgage. The expenses you need to consider include the origination fees paid to your Mortgage Company or Broker including application fees, and all third party settlement costs you are required to pay at closing.

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Make a list of these costs using the Good Faith Estimate you were provided. If you don’t have a Good Faith Estimate yet most mortgage lenders will provide you one upon request, even if you haven’t submitted your application. Next, determine how much you will save each month with a lower mortgage payment. To calculate your break even point, simply divide the sum of your costs by the amount you will save. This figure is the number of months it will take you to recoup your expenses.

Here is a simple example to illustrate the break even point. Suppose it will cost you $3,000 in origination fees and closing costs to refinance your mortgage. The lower mortgage rate results in a monthly payment that is $65 lower than your old mortgage. It will take you 46 months, just under four years before you realize a savings from refinancing the loan. Is mortgage refinancing worthwhile? The answer to this question depends on how long you plan on keeping your home and what your financial goals are for the mortgage.

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