A break-even analysis is the calculation that determines how long it takes to recoup the costs of refinancing through your payment savings. This calculation is largely only beneficial in Rate/Term Refinances.
- Current Principal & Interest Payment = $2,232.
- New Principal & Interest Payment = $2,005
- Loan Fees = $3,500
- Cost ($3,500) / Payment savings ($227) = 15.4 months
This means that it would only take 15.4 months of saving $227 per month to recoup the cost of refinancing. So, if you were going to stay in the house for at least the next 3 years, you would realize saving $227 for 21 months ($4767 in total payment savings) just by refinancing. Conversely, if you sold or paid off the loan in month 12 of the new loan, you didn’t recoup the value of your loan given the cost it took to obtain the mortgage in the first place.