Using Break-Even Analysis to Refinance your Mortgage
Before you consider refinancing your existing mortgage, it’s important for you to determine the break-even point, which represents how soon the cost of the refinance will be recaptured through lower monthly payments.
The answer to this question depends on multiple factors. These factors include your current interest rate, the new potential rate, closing costs and how long you plan to stay in your home. But while the break-even point is easy enough to calculate, other factors may also influence your decision and, if it’s a go, the type of loan you’ll select.
While there is no rule of thumb for the maximum payback period (break-even point) that makes sense for most borrowers, three years or fewer typically is considered reasonable if you intend to keep your mortgage at least that long.
If you can get a true zero-cost refinance, your break-even point will occur immediately. In that case, it may make sense to refinance your mortgage even if your interest rate is lowered by just an eigth of a percentage point, because you’ll save money every month, though the amount may be small. A true no-cost refinance means you pay no money upfront and neither your loan amount nor your interest rate is increased to build any costs into your new loan.
As your mortgage advisors, we can help you sort through the confusion by providing you with a quick and easy break-even analysis to determine if refinancing your mortgage is a sound financial decision.
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