Refinancing and Break Even Analysis

Too often, refinancing homeowners will take one look at the closing costs total on their good faith estimate and run to the hills, exclaiming that they are “too high”, before they actually examine the whether the proposed new home loan will be a benefit for them or not.

One thing is for sure. Everyone wants the lowest mortgage rate possible, but that “lowest” rate available will come at a cost called “discount points”. Now, discount points get a bad rap, but they can actually end up being your best friend if you plan on staying in your new mortgage for the long-term.

But, you don’t even really need to bother yourself with how many discount points are included in your quote to figure your net benefit or non-benefit for the loan. This can be determined rather easily by using “Breakeven Analysis” to get down to the bottom line.

For example, suppose you have a lender quote and good faith estimate for a shiny new low interest rate. Forget how many points, fees, and all that stuff. You need to pay attention to the bottom-line closing costs. Bottom line closing costs include everything on your good faith estimate except any estimation for property tax escrow deposits, homeowner's insurance (and homeowner's association dues if applicable) escrow deposits, and pre-paid interest estimations. That leaves you with the true cost of the loan.

So, your bottom line closing costs amount to $6,500 for a super low mortgage rate that is going to save you $250 per month. Divide the cost ($6,500) by the monthly savings ($250) to result in your Break Even Point of 26 months. If you plan to stay in your new mortgage for more than 26 months, this is a good deal. If not, then you might want to pass on that deal. Yes, it is that simple!

In many cases, a little bit higher interest rate with lesser fees is a better overall deal when the borrower’s timeframe is relatively short. But now that you know the breakeven analysis method, you can figure out different options within minutes and pick the best deal for you. It can also prevent you from making a financial mistake when the overall figures do not work in your favor. The numbers don’t lie.

With that said, mortgage refinance rates have been rather consistent for a second week in a row. This is a good thing when interest rates are near historic bottoms as they stand at the moment.

If you need a quote or someone to go over your specific refinance scenario, including a breakeven analysis, don’t hesitate to call or request a quote online with the Refinance Tool Box. We are here to help and never use the high-pressure sales tactics that many refinancing homeowners encounter.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box