What Is The Refinance Break-Even Point?
Author:
Victoria ArajMay 6, 2024
•8-minute read
If you’re looking to refinance your mortgage to take cash out for a home improvement, consolidate debt or build your emergency fund, you may want to figure out whether it makes sense to take on a new mortgage loan. One way to make this determination is to calculate the break-even point for a refinance.
The break-even point for a mortgage refinance can be a useful metric to analyze whether it’s the right time to refinance your home loan.
What Is The Mortgage Refinance Break-Even Point?
The refinance break-even point is the point at which it starts making financial sense to refinance and take on the terms of a new mortgage.
Before deciding if you should refinance, you’ll want to look at your goals and your original loan terms. You’ll want to make sure that refinancing will save you more money than what you’ll pay in closing costs and interest on the new mortgage.
If the closing costs and interest rate on the new loan are lower than what you’d pay on your current loan, you’ve hit your break-even point. If they’re higher, mortgage refinancing may not be the best financial decision right now.
As you shop around comparing the rates and terms from different lenders, consider calculating the break-even point for each refinance option. The break-even point may vary based on the interest rate, loan term and closing costs associated with each mortgage.
What Does The Refinance Break-Even Rule Look Like?
If your refinance goal is to save money on your monthly mortgage payment, the important thing to consider is how long you’ll be in the home or in that mortgage. If you plan to move or refinance again before you break even, it’s probably not worth refinancing.
On the other hand, if you plan to stay in the home beyond that point, you may want to consider refinancing.
While this rule is helpful, every situation is also different. You’ll need to make sure you prioritize your own financial goals when refinancing so that the benefits outweigh any additional costs.