break even period in refinancing

Guest

What is the importance of break-even period in refinance? How long it can take to break even on a mortgage refinance?

Samantha · Last edited by Samantha on Fri Jul 21, 2006 12:37 pm

Hi Hoskins,

Break-even period is the time period over which you can make up for the closing costs in a refinance by saving interest which you would have paid if you had continued with the current mortgage.

For example: If the total refinancing cost is $2000 and you save $100 monthly on the new loan, then it will take 2000/100 = 20 months to break even.

If you don't plan to stay in your home for a time period longer than the break-even period, then it makes no sense to refinance.

The break-even period depends on several factors. These include your current interest rate, the new potential rate, closing costs and the time period for which you plan to stay in your home.

Feel free to ask if you have more queries.

God bless you.

For MortgageFit,
Samantha

colin · Posted: Fri Jul 21, 2006 12:02 pm Post subject:

Hoskins,

You must stay in your house longer than the break even period. If the break even period is longer than you expect to own the house then don't go for a refinance.

Coiln

Guest

Thanks for the prompt response. But is it always required to analyze the break even period?

colin · Posted: Fri Jul 21, 2006 12:14 pm Post subject:

Hi Hoskins,

If the lender you want to refinance with, offers a zero point or zero fee loan then you can avoid most of the fees associated with a refinance.

On this type of loan you need not go for a break even analysis as there is no upfront expense to be recovered but your monthly payments may be higher as the lenders charge higher rate on this type of loan.

Guest

Ok, now in many of the posts, on refinance, in this forum I have seen that consumers have been requested to check for the pre-payment penalty before refinancing. Does it affect break even analysis?

Samantha · Posted: Fri Jul 21, 2006 12:37 pm Post subject: break even analysis

Hi Hoskins,

This is a very good question to ask. Smile

Yes, pre-payment penalty must be added to the total refinancing costs during your break even analysis.

For example:

Your refinancing costs = $2,000
Pre-payment penalty on the existing mortgage = $1,000
Total fees for your new mortgage = ($2,000 + $1,000) = $3000
Your Monthly savings = $100

So, it takes $3000/$100 = 30 months to break even.

Don't hesitate to ask if you have more queries.

God bless you.

For MortgageFit,
Samantha

Guest

Thanks to both of you for explaining it to me.

sara · Posted: Fri Jul 21, 2006 9:42 pm Post subject: RE:

Hi,

The more the difference between the new interest rate and the rate on your current mortgage, the shorter is the break-even period. The period becomes longer if the costs of the new loan are higher.

Sara

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