Refinancing Breakeven Point Calculation
This is one of the basic factors to check when thinking of refinancing your mortgage, and surprisingly this is one of the financial factors most people have the greatest error with. Calculating the refinance break even point is not difficult, and because of that many take the break-even short cut and can end up doing a crucial mistake!
What Is Refinance Break Even Point
The refinance break even point or break even period, is the amount of month a person needs to be living at the refinanced home , before the new mortgage savings take affect. his is commonly one of the first calculations someone refinancing needs to do, and because many do a basic mistake calculating their refinance break even point, they either quit or give up their chance to refinance!
The Refinancing Break Even Point Breaks People’s Hope
Any mortgage broker you turn to, in order to begin your refinancing process, will ask you at the beginning of the meeting: “How much time do you plan to stay at your current home?”. Then they will run a short refinance break even calculation, and they will show you that you will break even within 31 month.. or 55 month..
Others will read refinancing articles and see there the simple refinancing break even calculation, they will do the math themselves, see the figures and the first thing the do is get disappeared and lose hope for refinancing.
The homeowners have no idea that the mortgage broker and most blogs are showing the most basic mistake of miscalculating the refinance break even point.
What Is The WRONG Refinancing Break Even Point Calculation
Before we review the CORRECT refinancing break-even calculation, it is important you meet the most common mistake usually done. This wrong calculation is done as a rule of thumb in most cases people do not use a breakeven calculator to do it but just simple math.
Lets say you have current monthly payments of $1500 and you run a refinance calculation to see if the refinancing would save you money and the NEW mortgage monthly payments are $1420. This means that refinancing will save you $80 per month.
But refinancing has costs and fees. These fees and costs are paid upfront at the closing of the new mortgage. Lets say the mortgage points were $2400. The basic break even calculation most people would do will then be, to divide the cost by the monthly savings.
This will give them the amount of month it would take to pay off the refinancing costs. In our example it would be 2400/80 = 30. This means it would take 30 month until the closing costs are paid and the real saving of the refinance would take place.
Mortgage Refinance Break Even Period
These 30 month are also called ‘break-even-period’ because if you move from your current home before the 30 month period, then there would be no savings for the refinance process at all. So the mortgage broker (and you) will need to know your future plans before determining that the refinancing was worthwhile the hassle.
Why The Break-Even Rule Of Thumb Is Wrong
There are several factors that this mortgage break even calculation misses, and these factors are critical before taking a decision whether to refinance or not. So lets do some analysis for the mortgage refinance breakeven point:
Loan Balance – There is a difference between the original mortgage principle and the refinanced principle. Different loan balance means that there is a different amortization chart for each, and this means that the borrower will probably owe LESS to the lender at the end of the 30 month with the refinanced mortgage.
Now if at the end of the 30 month (because of the different amortization process) the borrower owes $4000 less on their overall amount debt, the 30 month ‘break-even-point’ is not correct… and should be much sooner.
Time Value of Money. Cash payments you pay today are ‘worth’ more than money paid somewhere in the future. Why? Because if you have $5000 today, investing them in any investment plan the bank gives you, will make them worth in the future more than $5000. So placing a $5000 closing costs now, is not similar to the value of reaching the same $5000 within 30 month.
Tax Deduction. When dealing with money, every bit counts, and the overall picture needs to be seen. Points and interest rates are both tax detectable, but they have different tax value. The points are detectable for the same year of the loan, while the mortgage interest is tax detectable for the years they are paid.
How To Calculate The Mortgage Refinance Break-Even Point
Follow the steps below to find out is it worth for you to refinance your current mortgage.
Should I Refinance?
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