EchoBay Expert: I have several quotes from mortgage brokers and online lenders to refinance my home but a few have closing costs that seem high but interest rates that are lower than others. How do I calculate when I breakeven from paying closing costs?
Loyal Reader: Calculating the breakeven point for your loan is a smart thing to do. To calculate the breakeven point, you need to know your current mortgage payment, the proposed mortgage payment and the amount of closing costs.
The formula is: closing costs / (current payment - proposed payment) = # of months to breakeven. For example, if your current payment is $1,050 and your proposed payment is $875 with $4,500 in closing costs, it will take you 26 months to breakeven. $4,500 / ($1,050-$875). This means you must stay in the house for at least 26 months to breakeven.
After that point, you will be saving money by refinancing. If you sell your house before then, you will have lost money on refinancing your mortgage because of the closing costs even though your payments are lower.
Some people jump at a lower interest rate without taking into consideration how much longer they plan to stay in their home or what their breakeven point is. This calculation is a must for any one who is considering refinancing their mortgage.