Posted on: 17th Apr, 2010 02:18 am
hi,
i'm using this mortgage refinance calculator but something isn't really clear for me.
http://www.mortgagefit.com/calculators/refinance.html
as i can read on that page they tell us:
[size=9:82573df5a8]how to calculate break-even period
the refinance mortgage calculator (refinance break-even calculator) figures out the break-even period, which is the minimum time period for which you should stay in your property so as to recover the closing costs.
here's an example which explains how to calculate break-even period.
let's say you have taken a mortgage worth $100,000 for 15 years. your monthly payment at 8% interest rate is $955. now, if you're refinancing at 6.5% for next 15 years, then your monthly payment (according to free refinance calculator) will be = $871.
so, you can save $ 955 - $871 = $84 on a monthly basis.
now, the closing costs for refinancing = $1200
break-even period = ($1200/$84) = nearly 14 months[/size:82573df5a8]
if i enter this values on that calculator it give me 10 months to break even and not 14 months.
where is the error?
please help.
i'm using this mortgage refinance calculator but something isn't really clear for me.
http://www.mortgagefit.com/calculators/refinance.html
as i can read on that page they tell us:
[size=9:82573df5a8]how to calculate break-even period
the refinance mortgage calculator (refinance break-even calculator) figures out the break-even period, which is the minimum time period for which you should stay in your property so as to recover the closing costs.
here's an example which explains how to calculate break-even period.
let's say you have taken a mortgage worth $100,000 for 15 years. your monthly payment at 8% interest rate is $955. now, if you're refinancing at 6.5% for next 15 years, then your monthly payment (according to free refinance calculator) will be = $871.
so, you can save $ 955 - $871 = $84 on a monthly basis.
now, the closing costs for refinancing = $1200
break-even period = ($1200/$84) = nearly 14 months[/size:82573df5a8]
if i enter this values on that calculator it give me 10 months to break even and not 14 months.
where is the error?
please help.
Hi perinidavide,
While I calculate the break even period, it is nearly 14 months. In order to calculate the break even period, you will have to divide the closing costs for refinancing by the amount you save on a monthly basis after refinancing the loan. In this case, the closing cost is $1200 whereas the monthly savings is $84. Thus, when you divide both of them, it comes to 14.28.
Take care.
While I calculate the break even period, it is nearly 14 months. In order to calculate the break even period, you will have to divide the closing costs for refinancing by the amount you save on a monthly basis after refinancing the loan. In this case, the closing cost is $1200 whereas the monthly savings is $84. Thus, when you divide both of them, it comes to 14.28.
Take care.
really thanks for your answer anyway something is wrong or is explained in a wrong way because if I feed that calculator with the parameter given in the example it return 10 months and not 14 months.
I noticed that this is usual in all web calculator I tryed so I want to understand why all the web calculator I've found give me 10 months instead of 14.
this is an example using the calculator I linked,
as you can see it give us 10 months.
I noticed that this is usual in all web calculator I tryed so I want to understand why all the web calculator I've found give me 10 months instead of 14.
this is an example using the calculator I linked,
as you can see it give us 10 months.
The problem is you're mixing accounting methods when trying to do the calculation. There's two ways to look at it. The cash-flow method and the accrual method. When you're comparing the change in the actual payment, you're looking at your cash flow. When you're looking at the actual interest charges, you're using the accrual method.
Other factors are whether or not you finance the closing costs and what rate of return you could get from a savings account.
As a mortgage professional, I did extensive analysis on this and built a worksheet that does side by side amortization analysis and then ran a bunch of scenarios. What I discovered is that for the most part, the easiest way to calculate your break even in real simple terms is to take the closing costs as a percent of the loan amount (1.2% in your example), and divide it into the interest rate savings. (1.2% / 1.5% = 0.8 ). That will give you the number of years it takes to break even. (0.8 X 12 = 9.6 months in this case).
This works best for a 30 year loan, the shorter the term, the more that early principal payments affect the actual break-even point. In reality both calculations above could be considered accurate, they just represent two different ways of accounting.
Other factors are whether or not you finance the closing costs and what rate of return you could get from a savings account.
As a mortgage professional, I did extensive analysis on this and built a worksheet that does side by side amortization analysis and then ran a bunch of scenarios. What I discovered is that for the most part, the easiest way to calculate your break even in real simple terms is to take the closing costs as a percent of the loan amount (1.2% in your example), and divide it into the interest rate savings. (1.2% / 1.5% = 0.8 ). That will give you the number of years it takes to break even. (0.8 X 12 = 9.6 months in this case).
This works best for a 30 year loan, the shorter the term, the more that early principal payments affect the actual break-even point. In reality both calculations above could be considered accurate, they just represent two different ways of accounting.
To clarify a litte further.
Cash method: Closing costs (paid in cash) divided by payment savings (cash flow) = break even period.
$1,200 / $83.89 = 14 months.
Accrual method: Closing costs (financed) compared to actual interest saved over time = break even period.
Two side by side amortization charts comparing a 15 year $100,000 8% loan to a 15 year $101,200 6.5% loan shows interest savings of $1,179.19 after 10 payments.
The problem here is that the $100,000 loan probably doesn't have 15 years remaining if it is being refinanced. Things start to get really tricky when you take that into account and then start adding other scenarios like additional interest payments, etc.
Cash method: Closing costs (paid in cash) divided by payment savings (cash flow) = break even period.
$1,200 / $83.89 = 14 months.
Accrual method: Closing costs (financed) compared to actual interest saved over time = break even period.
Two side by side amortization charts comparing a 15 year $100,000 8% loan to a 15 year $101,200 6.5% loan shows interest savings of $1,179.19 after 10 payments.
The problem here is that the $100,000 loan probably doesn't have 15 years remaining if it is being refinanced. Things start to get really tricky when you take that into account and then start adding other scenarios like additional interest payments, etc.
really really thanks. it's clear :)