Question:

How to calculate the break-even period on a mortgage refinance or when buying discount points?

When refinancing borrowers need to know how to calculate the break-even period so that they know when their closing costs will be recovered. The lower the interest rate of the new home loan, the sooner the break-even will occur.

How is the break-even period calculated exactly?

To answer this, you need to know the following:

1. Your monthly payment before the refinance;
2. Your monthly payment after refinancing;
3. Your refinance closing costs (points and fees).

The formula is 3 / (1 - 2).

That is, if your refinance closing costs are \$4400 and after the refinance your monthly payment drops down with \$110 the break even occurs after 40 months.

The same approach applies when calculating the break-even on buying mortgage points.

Borrowers often want to know how to determine how many points to buy to lower their monthly payment. The break-even is calculated in exactly the same way.

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