How to calculate break even point for mortgage refinance

Should You Refi Your Mortgage? Calculate Your Mortgage Refinancing Break Even Date & Interest Savings

Mortgage Refinance Breakeven Calculator

This calculator makes it easy for homeowners to decide if it makes sense to refinance their mortgage to a new loan with a lower interest rate. It calculates how many months it will take for the refinance interest & payment savings to pay for the closing costs of the new loan, along with the monthly loan payments and net interest savings.

Please note this calculator is for straight refinances that do not extract any additional equity. Please use our cash out refinance calculator if you are cashing out equity when you refinance. If you are consolidating 2 mortgages when you refinance please use our mortgage consolidation calculator.

"Zero" Closing Cost Mortgage Refinancing?

All mortgages have closing costs. If a lender tells you there are "no closing costs" then the loan origination fees and any discount points are embedded either in the loan either as a larger loan size or at a higher rate of interest. Our calculator allows you to add closing costs to the loan or pay them out of pocket & calculates your break even date either way.

For your convenience we list current local mortgage refinance rates to help homebuyers estimate their monthly payments & find local lenders.

Current Local Mortgage Refinance Rates

Compare your potential loan rates for loans with various points options.

The following table shows current local 30-year mortgage rates. You can use the menus to select other loan durations, alter the loan amount, change your down payment, or change your location. More features are available in the advanced drop down

Breaking Even on Mortgage Refinancing

With savings in mind, many homeowners rush to refinance their mortgage when market rates are low. A lower rate helps reduce monthly mortgage payments and total interest costs. Because of this, refinancing activity generally increases when mortgage rates fall.

The Adverse Market Refinance Fee

Due to the 2020 COVID-19 crisis, the global economy plunged into recession and caused an estimated loss of $6 billion for Fannie Mae and Freddie Mac. In August 2020, both government-sponsored enterprises announced the imposition of a 50 basis point Adverse Market Refinance Fee to be implemented by lenders.

The Adverse Market Refinance fee was initially scheduled for September 1 but was moved by the FHFA to December 1, 2020 to reduce shock among mortgage lenders. Refinances with loans less than or equal to $125,000 are exempted from this fee, as well as FHA and VA refinances. Homeowners tried to apply as early as October to avoid the December 1 deadline.

While many people try to refinance when rates are low, it doesn’t always mean its the best move. Consumers may be discouraged from refinancing because it entails substantial costs. Thus, it’s important to know the right circumstances to refinance. If you’re not careful, mortgage refinancing might end up costing you more.

When It Makes Sense to Refinance Your Mortgage

Refinancing is basically replacing your existing mortgage with a new loan. It allows you to obtain better rates and terms. It even lets you change the type of loan and payment structure of your mortgage. But before you apply for refinancing, here a several factors you should carefully assess:

Lower Market Rates

Consider refinancing if you can significantly lower your interest rate. Check current refinance rates to see if they drop low enough to justify refinancing. Financial experts advise lowering your rate by one-half to three-quarters of a percentage point. Rates this low can substantially decrease your monthly mortgage payments.

On the more conservative side, some financial experts recommend lowering your rate by at least 2 percentage points. The lower your mortgage rate, the less time it will take to breakeven on your refinancing costs.

Is It Aligned with Your Financial Goals?

Next, carefully assess your financial situation. Are you currently paying a large interest debt? Can you prioritize refinancing expenses? If you’re tight on funds, refinancing your mortgage is out of the question. To save on interest and slightly shorten your term, you’re better off making small extra payments on your mortgage than refinancing.

On the other hand, new mortgage closing costs typically range between 2% to 5% based on your home’s purchase price. Closing costs for new home purchases require similar documentation. For this reason, it makes sense to refinance with the same lender, because they don’t require all documents to be new for application. Staying with your original lender also gives you higher chances of scoring a favorable rate.

Other important factors also affect the cost of refinancing. When you obtain a mortgage, points are assigned to your loan. Here are two main points you should watch out for:

Discount Points

Discount points are upfront fees you pay a lender to lower your loan’s long-term interest rate. A discount point is an interest payment based on the total amount of your mortgage. Each point is equivalent to 1% of your loan principal, which lowers your interest rate by around 0.25%. Purchasing discount points make the most sense when you plan to stay long-term in a home.

For instance, if your principal is $300,000, a discount point would cost $3,000. Discount points can also be purchased as a half point or quarter point. So if your principal is $300,000, a half point is $1,500, and a quarter point is $750.

Origination Points

Lenders charge origination fees to pay for the cost of processing your loan. These are points that come as a percentage of your loan amount. Expect lenders to set a profit within the origination points they charge. But the good news is origination fees are negotiable as the lender already has a spread in the interest rate they charge on the loan. Talk to your lender to reduce your origination points and maximize your savings.

How Long Are You Staying in the House?

Consider how long you intend to stay in your home. If you’re moving within the next two or three years, you won’t have enough time to breakeven on your refinancing costs. You’ll lose money instead of gain savings. You’re better off saving your money to cover your move.

Another factor to consider are early repayment fees. Prepayment penalty is a charge that lenders impose if you refinance, sell your home, or pay off your loan principal before the due date. Expensive penalty fees can cancel any savings you make from refinancing or prepaying your mortgage.

As of January 10, 2014, lenders can only charge prepayment penalty for the first three years of a mortgage. This rule was employed by the Consumer Financial Protection Bureau (CFPB) for most residential loans. However, it does not apply to mortgages purchased before the January 2014 rule. Make sure to check your prepayment penalty clause before prepaying or refinancing your loan.

Do You Have a High Credit Score?

Furthermore, check your credit rating. To qualify for refinancing, your credit score must be at least 620. But even then, it does not guarantee a much lower mortgage rate. To obtain the best rates and terms, you must have an excellent credit score.

Improve your credit rating before applying for refinancing or any new loan. You can increase your credit score by paying bills on time and reducing your debts. Overall, a better credit profile will help you obtain more favorable loan deals in the future.

Government Backed Mortgage Programs

For government-backed mortgages, credit standards are more relaxed compared conventional loans. Below is a list of credit requirements to refinance government-backed mortgages:

• FHA Loans – Qualifying for FHA streamline refinance does not require credit score checks but is based on your payment history. Credit scores as low as 500 are still accepted. For FHA cash-out refinancing, your credit score must be at least 580. Most FHA-sponsored lenders also prefer borrowers with a credit score of 600 and 620. FHA cash-out refinancing allows borrowers to tap up to 80% of a home’s value.
• VA Loans – Applicants with VA loans can take advantage of the Interest Rate Reduction Refinance Loan (IRRRL) program. The IRRRL does not impose a minimum credit score, but VA-sponsored lenders prefer a credit score of at least 620. VA cash-out refinancing allows qualified applicants to tap up to 90% of a home’s value.
• USDA Loans – For USDA streamlined-assist refinancing, borrowers don’t need to submit to income qualifications or credit reviews. To be eligible, you need to have paid your mortgage for 12 months before applying for refinancing. USDA loans do not offer cash-out refinance options, which means they only provide rate and term loans.

Make Sure to Have Enough Home Equity

Check how much equity you have on your home. For a conventional loan, you should have at least 20% home equity to be eligible to refinance. That’s a loan-to-value ratio (LTV) requirement of 80 percent or less. This automatically removes private mortgage insurance (PMI) when you refinance your loan. Most mortgage lenders also expect borrowers to keep their mortgage for at least 12 months before they can refinance.

In some cases, other lenders may only require 5% home equity. But keep in mind that low home equity and high LTV ratio results in a higher interest rate. You’ll also end up paying for PMI on your loan.

Before Refinancing

Assess your financial situation, your credit score, and if you have enough home equity to refinance. Consider prepayment penalty fees if you’re refinancing within the first three years of your mortgage. You should also have a high credit score to obtain lower rates. A low rate reduces your monthly mortgage payments and shortens the time it takes to recoup your expenses. It’s also ideal to stay long-term in a house to ensure you have enough time to breakeven on the refinancing costs.

Why People Choose to Refinance

Most homeowners choose a straight rate and term refinance that reduces their rate and makes their repayment term more manageable. You may choose to shorten your loan to 15-year term. This increases your monthly payment, but it pays off your mortgage early while saving a great deal on interest payments. On the other hand, you may opt to reset your term to 30 years, which lowers your monthly payments. But beware. Extending your term means you’ll pay higher total interest on your loan because of the added years.

Refinancing allows you to change the type of loan you have. If you have a government-backed mortgage such as an FHA loan, you’re required to pay mortgage insurance premium (MIP). MIP is required for the entire life of a 30-year fixed-rate FHA loan. This is a costly added fee that protects lenders in case you default on your mortgage. To eliminate MIP, many homeowners with FHA loans eventually refinance into a conventional loan.

Next, refinancing enables you to shift from an adjustable-rate mortgage (ARM) to a fixed-rate loan and vice versa. Many homeowners with an ARM eventually refinance into a fixed-rate mortgage to lock in a low rate. This ensures their rate remains the same throughout the term. When index rates are high, they don’t have to worry about increasing payments in the future.

Homeowners also have the option to take cash-out refinances. This allows you to borrow money against your home equity while refinancing your mortgage. If you’re looking to fund home renovations or pay for your child’s college tuition, this is a viable option.

The Time It Takes to Refinance Your Loan

Mortgage refinancing typically takes 30 days up to 45 days to close. But this can take more time, depending on market conditions and the type of loan you get. During seasons when more homeowners refinance, the process can take longer.

In August 2020, the Ellie Mae Origination Insight Report showed mortgage refinances took an average of 50 days to close. Across loan types, home loans backed by the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) took longer to close than conventional loan refinances.

The report also revealed that loans with lower interest rates had longer average times to process. It shows that refinances took around 15 days longer in August 2020 compared to March 2020 when mortgage rates began decreasing at historic lows.

Determine If It’s Worth Refinancing

It’s important to calculate how many months it will take to recoup your refinancing costs. This is called the breakeven point, which is the time you’ll start making real savings from refinancing. Using our calculator on top, let’s estimate how much interest you’ll save and how many months it will take to reach your breakeven point.

Suppose your original mortgage is a 30-year fixed-rate loan that you’ve paid for 10 years. The remaining loan you owe is worth $200,000 with an interest rate of 5% APR. You have 20 years left to pay off your mortgage. Your original monthly payment is $1,319.91.

Now, you plan to refinance into a 15-year fixed term at 3.25% APR. On top of this, you purchased 1 discount point and paid 1 origination point to your lender.

The table below estimates your refinancing cost, interest payments, and the number of months it would take to reach your breakeven point.

Example A

• Remaining amount on original mortgage: $200,000
• Remaining months on original term: 240 (20 years)
• Rate on original mortgage: 5% APR
• Original monthly payment: $1,319.91
• Refinanced loan term: 15 years
• Refinanced loan rate: 3.25% APR
• Discount point: 1 (not financed)
• Origination point: 1 (not financed)

According to the results, if you refinance your original mortgage with 5% rate into a 3.25% mortgage, you monthly payment will increase by $85.43. You’ll also save $63,818.38 in interest charges over the life of the loan compared to keeping your original mortgage.

However, in order for refinancing to yield savings, you must stay in your home for at least 21 months without moving or refinancing again. That’s how long it will take for the monthly interest savings to offset the cost of refinancing. If you move or refinance again before 21 months, you’ll lose money on your points purchase.

In the next example, let’s suppose every factor remains the same except for the discount points. In this scenario, instead of purchasing 1 discount point, you purchased 1.5 discount points. As a result, this lowers the refinanced interest rate to 3% APR. Let’s see how it will affect your refinancing costs.

Example B

• Remaining amount on original mortgage: $200,000
• Remaining months on original term: 240 (20 years)
• Rate on original mortgage: 5% APR
• Original monthly payment: $1,319.91
• Refinanced loan term: 15 years
• Refinanced loan rate: 3% APR
• Discount point: 1.5 (not financed)
• Origination point: 1 (not financed)

In this example, if you refinance your original mortgage with 5% rate into a 3% mortgage, your monthly payment will increase by $61.25. You’ll also save $63,818.38 in interest charges over the life of the mortgage. Compared to example A, your monthly payment will be slightly cheaper by $24.18, while your total closing costs will increase by $1,000. You save more on interest payments by $4,351.08 with example B. But like example A, you must stay in your home for at least 21 months in order for refinancing to reach a breakeven point and yield actual savings.

Based on the two examples, if you can purchase extra discounts points, you’ll save more by choosing example B, especially if you’re staying long-term in your house. It offers more interest savings and has a slightly lower monthly payment compared to example A.

Cash-out Refinancing for Major Expenses

Besides saving on your mortgage, you can take advantage of cash-out refinancing to tap your home equity. It’s a way to refinance your home loan while borrowing money at the same time. Accessing home equity enables you to pay for major costs such as home improvement projects. Others also use it to consolidate high-interest debts into a lower rate, or to pay for their child’s college education.

When you get a cash-out refinance, it replaces your original mortgage with a new loan for more than you owe on your home. The difference is given to you in cash, which you can use to fund important expenses. This option usually has a lower rate compared to taking a second mortgage such as a HELOC or home equity loan.

Since a cash-out refinance has a higher loan amount, it usually has a higher interest rate than your current mortgage. Depending on the type of loan, borrowers can cash out around 80% to 90% of their home’s value.

When to Consider Cash-Out Refinance

Cash-out refinancing is a good option if you’re eager to obtain cash while changing your mortgage rate and term. It enables you to access your home equity under the condition of taking a higher loan principal. For example, let’s say your existing mortgage has a principal balance of $200,000. If you need $30,000 to remodel your home, you can take a cash-out refinance worth $130,000. Your lender gives the $30,000 after closing, then you pay back the loan in monthly installments.

Dangers of Debt with Home as Collateral

While cash-out refinances can be used to consolidate high-interest credit card debt, it puts your home at risk. If you don’t have the self-control to keep your credit card debt from growing, you might lose your home to foreclosure. If you’ll take this option, make sure to maintain consistent monthly payments on your mortgage.

Tax Incentives

You are eligible for mortgage interest deductions when you refinance your home loan. This tax deduction incentive is given to homeowners to reduce interest payments on their mortgage. But note that it’s only granted if you use the loan to build, purchase, or make home improvements on your property. For example, if you obtained a cash-out refinance to extend your property, you’re eligible for mortgage interest deductions. However, if you use the loan to pay for your child’s college tuition, or to consolidate debt, you won’t get any interest deductions.

Home mortgage interest can be deducted on the first $750,000 of a borrower’s debt. For those married and filing separately, deduction is granted on the first $375,000. If you obtained your mortgage before the Tax Cuts and Jobs Acts of 2017, you can deduct interest on up to $1 million if you’re the head of the household, and $500,000 if you’re married and filing separately. But after 2025, the home mortgage interest deduction limit is expected to revert to $1 million.

Other Ways to Tap Your Home Equity

Apart from cash-out refinancing, you can take a second mortgage to access your home equity. A second mortgage is a lien taken against a house that already has a mortgage. Your lender basically takes a lien against a part of your property that you’ve paid off.

When to Consider a Second Mortgage

If you need a significant amount of cash but don’t want to change your mortgage terms, taking a second mortgage is ideal for you. It’s a viable option especially if cash-out refinancing rates are higher. This keeps your existing rate and payment term. The closing costs for second mortgages are also more affordable compared to cash-out refinancing. And if you want to the option to get your loan as a line of credit instead of a lump sum, you can do so with a second mortgage.

How does a second mortgage work? A second mortgage is a completely different loan from your original mortgage. Lenders let you borrow money against your home equity, then you pay it back with interest. While you’re making payments on your original mortgage, you’re making a separate payment on your second mortgage. Refinancing, on the other hand, replaces your existing mortgage with an entirely new loan. This only requires you to make one mortgage payment every month.

If you fail to repay your mortgage, a second lender only obtains their payment after the original lender gets paid. Because of this, second mortgages typically have higher interest rates than a refinance. The lower rates for refinances are also more appealing to borrowers.

There are two types of second mortgage, a home equity loan, and a home equity line of credit (HELOC).

Home Equity Loan

When you obtain a home equity loan, it’s given to you as a lump sum fund. Borrowers cash out all the money at once and repay it in installments. This option is ideal if you need a definite amount to cover a one-time cost, such as a kitchen renovation or other expensive purchases. Home equity loans may also be used to consolidate high interest debts. You can use this money to fund any large purchase or project as long as you pay back your lender within the agreed terms.

Home equity loans are structured as fixed-rate loans. They come in short 5-year terms, to longer 15-year terms and 30-year terms. The fixed-rate structure lets you pay a predictable amount every month. This way, you don’t need to worry about increasing payments when rates become higher. If you want the stability of fixed loan payments, this is the right option for you. It’s the opposite of HELOCs that come with adjustable rates.

The Advantage of Home Equity Loans

Compared to HELOCs, home equity loans ensure your loan payments don’t increase over the years. This makes it easier to budget your payments every month. And because it’s a one-time lump sum cash, you don’t run the risk of borrowing more money against your home equity. This is a more manageable way to repay your debt.

Home Equity line of Credit (HELOC)

A HELOC gives borrowers access to revolving credit which works much like a credit card. It allows you to withdraw funds as needed, either through an online transfer, writing a check, or a credit card connected to your account. The flexibility allows you to borrow more money against your home equity. If you’re paying for expenses over an extended period of time, consider this option. You can withdraw money up to a pre-approved limit while paying interest against the amount you borrowed.

HELOCs come with a “draw period” that typically lasts for the first 10 years of the loan. Once the draw period ends, you must begin paying back the loan. Next, HELOCS are structured with adjustable rates. This means when market rates are higher, your payments will also increase. And if rates drop, your payments can be smaller. The unpredictable payments are a tradeoff for its financial flexibility.

To protect borrowers from increasing rates, the law requires HELOCS to have a maximum interest rate cap on the loan. This ensures your payments won’t increase to unmanageable amounts. If you’re planning to get a HELOC, think of how this will affect your finances.

The Advantages of Home Equity Loans

Financial flexibility is the primary benefit of taking a HELOC. It allows you to borrow funds as needed without worrying about applying for a new loan. HELOC also allows you to pay compounded interest only on the amount you withdraw. Thus, you don’t need to pay for the total equity available on your account. HELOC is ideal if you’re planning to finance extended costs. This may include medical bills, your child’s college tuition, and other important purchases.

In Conclusion

Refinancing is a smart financial move that allows you to obtain more favorable mortgage terms. You can shorten your term and gain significant interest savings if you refinance to a low enough rate. Cash-out refinancing also gives homeowners the option to borrow money against their home equity.

But before you apply for refinancing, you must make sure you’re ready for the costs. First, check if general market rates are low to score a good rate. The credit score requirement to refinance is at least 620. But to obtain the best rate, aim to improve your credit score by paying bills on time and reducing your debts.

Next, make sure you’re staying long-term in a house. If you’re moving within the next two years, you won’t have enough time to break even on refinancing’s closing costs. You can also lower your refinancing rate by purchasing discount points, which is paid as an upfront cost to your lender. A lower rate allows you to recoup the cost of refinancing in a shorter period of time.

Besides cash-out refinancing, homeowners can access home equity by taking a home equity loan or HELOC. Home equity loans come as one-time lump sum cash with a fixed-rate interest. On the other hand, HELOCs allow borrowers to withdraw cash as needed through a revolving line of credit. It comes with an adjustable interest rate, which means your loan payments may increase over time.

Homeowners May Want to Refinance While Rates Are Low

The Federal Reserve has started to taper their bond buying program. Lock in today's low rates and save on your loan.

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