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Mortgage Refinance Break-Even Calculator

Analysis Results

function calculateBreakEven() { var currentP = parseFloat(document.getElementById('current_payment').value); var newP = parseFloat(document.getElementById('new_payment').value); var costs = parseFloat(document.getElementById('closing_costs').value); var resultArea = document.getElementById('result_area'); if (isNaN(currentP) || isNaN(newP) || isNaN(costs) || currentP <= 0 || newP <= 0 || costs < 0) { alert("Please enter valid positive numbers for all fields."); return; } var monthlySavings = currentP – newP; resultArea.style.display = 'block'; if (monthlySavings <= 0) { document.getElementById('monthly_savings_text').innerHTML = "Monthly Savings: $0.00"; document.getElementById('break_even_text').innerHTML = "Never"; document.getElementById('advice_text').innerHTML = "Your new payment is equal to or higher than your current payment. Refinancing may not be financially beneficial unless you are changing the loan term or pulling out equity."; return; } var monthsToBreakEven = costs / monthlySavings; var yearsToBreakEven = monthsToBreakEven / 12; document.getElementById('monthly_savings_text').innerHTML = "Monthly Savings: $" + monthlySavings.toFixed(2) + ""; document.getElementById('break_even_text').innerHTML = "Break-Even Point: " + Math.ceil(monthsToBreakEven) + " Months (" + yearsToBreakEven.toFixed(1) + " years)"; if (monthsToBreakEven <= 24) { document.getElementById('advice_text').innerHTML = "Strategic Move: This is a very short break-even period. Refinancing is highly recommended if you plan to stay in the home for more than 2 years."; } else if (monthsToBreakEven <= 60) { document.getElementById('advice_text').innerHTML = "Standard Move: You will recover your costs in " + yearsToBreakEven.toFixed(1) + " years. This makes sense if this is your 'forever home' or long-term investment."; } else { document.getElementById('advice_text').innerHTML = "Caution: It will take over 5 years to recover your costs. Consider if you might sell the home before then."; } }

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Understanding the Mortgage Refinance Break-Even Point

When you decide to refinance your mortgage, you are essentially replacing your current loan with a new one, typically to secure a lower interest rate or change the loan term. However, refinancing isn't free. You must account for closing costs, which can range from 2% to 5% of the loan amount.

What is a Break-Even Point?

The break-even point is the specific month in your new loan term where the total amount of money you have saved on monthly payments equals the total amount you paid in upfront closing costs. Once you pass this point, the monthly savings become "pure profit."

How to Calculate It

The math for calculating your break-even period is straightforward:

Total Closing Costs ÷ Monthly Savings = Months to Break Even

Example Calculation

Let's say your current Principal and Interest (P&I) payment is $2,000. You find a new rate that brings your payment down to $1,750, saving you $250 per month. If the bank charges you $5,000 in closing costs, your calculation would look like this:

• $5,000 (Costs) ÷ $250 (Monthly Savings) = 20 Months

In this scenario, if you plan to stay in your home for longer than 20 months, the refinance is a winning financial move.

Key Factors to Consider

• Length of Residency: If you plan to sell your home in 2 years but your break-even point is 4 years, you will actually lose money by refinancing.
• Loan Term Reset: If you are 10 years into a 30-year mortgage and refinance into a new 30-year mortgage, you are extending your debt by a decade. Even with a lower monthly payment, you might pay more in total interest over the life of the loan.
• Opportunity Cost: Consider what that closing cost money could earn if invested in the stock market instead of used to buy down a mortgage rate.
• Tax Implications: Mortgage interest is often tax-deductible. A lower interest rate might slightly reduce your tax deduction, though the direct savings usually outweigh this factor.

When is Refinancing a Bad Idea?

Generally, if your break-even point is longer than 60 months (5 years), most financial advisors suggest caution. Market conditions change, and the likelihood of you moving or needing to refinance again increases over longer periods. Always aim for a break-even point within 36 months for the most "forgiving" financial strategy.