Refinance Break-Even Analysis

What is a refinance break-even analysis?

A refinance break-even analysis shows how long it takes for the monthly savings from a new mortgage to pay for the cost of refinancing. The CFPB's home loan toolkit says to consider this when you look at a refinance.

The math has one step. You divide the total cost of the refinance by how much your monthly payment goes down. The answer is the number of months it takes to break even.

You can run your own numbers with the Refinance Break-Even calculator on this site.

Source: Consumer Financial Protection Bureau, "Your home loan toolkit: A step-by-step guide"

What does it cost to refinance?

Refinancing means paying off your current mortgage with money from a new mortgage. The CFPB says you could pay many of the same costs you paid when you got your current mortgage.

The CFPB's toolkit says refinancing costs can be about the same as the closing costs on your original loan. Closing costs are the upfront costs you're charged to get a loan. They include the lender's origination charges and fees for services the lender requires.

If your current mortgage has a prepayment penalty, you have to pay that penalty when you refinance. Your loan documents show whether your mortgage has one.

Some lenders advertise loans with no closing costs. The CFPB says they do this by charging a higher interest rate and giving you a credit, or by adding the closing costs to your loan amount. A higher rate means you pay more over time, and a bigger loan raises your payments and lowers your equity.

Sources: Consumer Financial Protection Bureau, "Should I refinance?"; Consumer Financial Protection Bureau, "Your home loan toolkit: A step-by-step guide"; Consumer Financial Protection Bureau, "Loan Estimate Explainer"; Consumer Financial Protection Bureau, "Is there such a thing as a no-cost or no-closing cost loan or refinancing?"

Where do you find the costs and the new payment?

The Loan Estimate is a standard three-page form. It shows a loan's estimated interest rate, monthly payment, and total closing costs. When you ask a lender for a refinance, the lender must give you one within three business days of getting your application.

The Loan Estimate breaks the closing costs into parts. These include the lender's origination charges, services you can't shop for, and services you can shop for. It lists points on page 2, Section A, and lender credits on page 2, Section J.

Points are a fee you pay at closing to get a lower interest rate. Lender credits work the other way. You get a higher interest rate in exchange for lower closing costs.

A Loan Estimate isn't a loan approval. When you get one, the lender hasn't yet approved or denied your application.

Sources: Consumer Financial Protection Bureau, "What is a Loan Estimate?"; Consumer Financial Protection Bureau, "Should I refinance?"; Consumer Financial Protection Bureau, "§ 1026.19 Certain mortgage and variable-rate transactions."; Consumer Financial Protection Bureau, "Loan Estimate Explainer"; Consumer Financial Protection Bureau, "How should I use lender credits and points (also called discount points)?"

What can a break-even number leave out?

A break-even number looks at monthly savings. It doesn't show the total you pay over the life of the new loan. The CFPB says a new loan with a longer term could mean a lower monthly payment but more money paid in total.

How long you keep the home also changes the picture. The CFPB says that if you know you'll move in the next few years, you might not have time to make back the cost of refinancing.

A refinance can change your principal and interest payment, but property taxes and homeowner's insurance may stay the same. A refinance to a shorter term can mean paying less total interest, but your monthly payment could be higher.

Source: Consumer Financial Protection Bureau, "Should I refinance?"