The break-even point in refinancing is the time it takes for the savings from a new mortgage to cover the costs of refinancing. It helps borrowers decide whether refinancing is financially worthwhile.
How It’s Calculated
Break-even = Total refinancing costs ÷ Monthly savings from lower payments. For example, if refinancing costs $6,000 and reduces your payments by $200 per month, the break-even point is 30 months ($6,000 ÷ $200).
Why It Matters
- For short-term homeowners: If you plan to sell before the break-even point, refinancing may not save money.
- For long-term homeowners: If you stay in your home well past the break-even point, refinancing can lead to significant savings.
Final Thoughts
Calculating the break-even point is essential before refinancing. It ensures the upfront costs are justified by long-term benefits.