What is the Break-Even Point?

In the realm of home loans, the break even point is the amount of time that it takes for a home owner to begin to see savings following a mortgage refinance. The break even point is an important concept to understand because it is what determines whether a home owner should or should not refinance his/her mortgage. The break even point can be determined through plugging in a home owner's specific variables into a simple mathematical equation. 

Because the purpose of mortgage refinance is to reduce monthly payments, a borrower’s first step is to determine his/her savings each month. Subtract the monthly payments required under the new mortgage from the monthly payments required under the old payments. 

The costs to refinance a mortgage are closing costs, processing costs, and any other upfront fees charged by the lending company. Divide these costs by the total monthly savings (found above). This is the number of months that it will take for a home owner to begin saving money. 

Although it does not show up specifically in the equation, the break even point calculation takes into consideration the term of the loan. A longer termed loan will have lower monthly payments than a shorter termed loan of the same amount. This will show up in the savings portion of the calculation. 

The break even point should be used by a home owner as a guide to see if refinancing a mortgage is worth the effort and cost. If the amount of time that the borrower will break even is too far into the future, refinancing may not be the best option. 


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