To save money when refinancing your mortgage it is helpful to know when your break-even period ends. This “break even period” when mortgage refinancing is the amount of time it takes to recoup your expenses from taking out the new loan. As a rule of thumb, the lower your new mortgage rate is compared to the old one, the shorter your break even period will be when refinancing.
One way to calculate your break even period is to divide the cost of your new mortgage by the amount of reduction in your monthly payment. While this will give you a general idea of your break even period it does not account for changes in the amortization schedule of your new loan. Here’s an example to illustrate this point.
Suppose you refinance your existing mortgage that had a balance of $100,000 and it costs you $3,500 in origination fees. The monthly payment of your new loan is now $1,015 which saves you $115 per month with a 15 year loan. Divide your expenses by the savings and you come up with approximately 30 months to recoup your expenses. This calculation does not take into consideration the shorter term length and lower interest rate of the new loan.
Calculating the break even point assumes you are refinancing with a lower interest rate and payment amount; however, there are perfectly good reasons for refinancing with a higher mortgage rate and payment amount. Many homeowners take a higher payment when refinancing with cash back or even shortening the term length. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with a free mortgage toolkit.
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Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. To get your hands on this “Mortgage Refinancing Toolkit, " which teaches strategies for finding the best mortgage and saving thousands of dollars in the process, visit .
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