What to Consider When Refinancing: Break Even Point

There are a number of important factors involved in considering home mortgage refinancing. One of the key factors that you must pay attention to when it comes to home mortgage refinancing is the break even point.

When you are trying to balance your savings against costs during the process of refinancing, you are most likely wondering where your break even point is. This is more than a mere curiosity—you should use this to determine how long you will need to stay in the house to make the refinancing worthwhile.

Determine All of Your Costs

Before you can work out your break even point, you will have to figure out all your costs, including how much tax deduction you will lose with smaller interest payments and what you might gain back in deductions by paying points. You will probably be paying for an appraisal, survey, points, application fee, title insurance, title search, and legal fees for the loan company’s lawyer to look over the papers.

Consider the Prepayment Penalty

Another thing to be sure of is the prepayment penalty. If you are refinancing after only a few years, you may have a hefty charge that would make refinancing a waste and cost you more in the long run. Find out from your old lender if you have a prepayment penalty and how much it is.

Understand the Interest Rate Completely

Sometimes a lender will offer a no cost or low cost refinance loan, for which you would pay a slightly higher interest rate. If you are considering one of these loans, make sure the interest rate increase won’t exceed the costs you are avoiding. One way or another, you will probably pay for the services, so you have to decide if you want the extra tax deduction from paying the interest or want to save the money up front.

Adding Up All Costs

Add all the costs of your loan together, and then have the lender give you the amount you will save on your house payments with the refinanced loan. Divide your refinancing costs by the new monthly house payment, and you have the number of months you will have to stay in the house to hit your break even point. You can also use an online refinance calculator to give you an idea of your break even point—www.domania.com has a detailed and thorough calculator for your use.

How Long Will You Reside in the Home

If you don’t want to stay in the house that long, consider waiting until you move to get a new home loan, or looking for another loan product, such as an ARM, a graduated payment mortgage, or balloon loan. Although those carry different inherent risks for the borrower, they will likely save you more money than a traditional fixed rate mortgage.