How do I calculate breakeven point on a shorter-term refi?

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ninjamelon
Posts: 57
Joined: Sat Jul 13, 2013 2:20 pm

How do I calculate breakeven point on a shorter-term refi?

Post by ninjamelon »

I'm looking for advice on calculating the breakeven point on a refinance when moving to a shorter-term mortgage. My payment will stay the same (basically).

Here are the background numbers:
  • Current mortgage: 30-year, 3.75%
  • New mortgage: 20-year, 2.75%
  • Closing costs: $3,700
  • The payment on the new mortgage is $50 more per month than the old mortgage
Amortization calculator
  • With a 20-year loan, I'll pay $500 more to principal each month (from day one) than with a 30-year loan.
Can I calculate my breakeven point as:
  • closing costs/$500 = 9 months until breakeven point
Thank you! I've googled this with no luck.
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Nate79
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Re: How do I calculate breakeven point on a shorter-term refi?

Post by Nate79 »

What is the mortgage balance? You calculate breakeven by taking the interest rate savings (1% in this case) times the mortgage balance. That's the $$ saved in a year roughly.
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RickBoglehead
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Re: How do I calculate breakeven point on a shorter-term refi?

Post by RickBoglehead »

You use a mortgage refinance breakeven calculator...

Oh, $3,700 / 500 isn't 9...

https://www.bankrate.com/calculators/mo ... lator.aspx
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RickBoglehead
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Re: How do I calculate breakeven point on a shorter-term refi?

Post by RickBoglehead »

Nate79 wrote: Thu May 06, 2021 9:53 pm What is the mortgage balance? You calculate breakeven by taking the interest rate savings (1% in this case) times the mortgage balance. That's the $$ saved in a year roughly.
Not quite. The answer is in months.
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
Hyperchicken
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Re: How do I calculate breakeven point on a shorter-term refi?

Post by Hyperchicken »

Back-of-the-envelope first order approximation formula is:

Break even [years] = Closing costs / (Mortgage balance * Interest rate reduction)

OP did not say what the mortgage balance is, so for the sake of this example I am going to assume $200,000. Then

Break even = 3,700 / (200,000 * (3.75% - 2.75%)) = 3,700 / 2,000 = 1.85 years.
Topic Author
ninjamelon
Posts: 57
Joined: Sat Jul 13, 2013 2:20 pm

Re: How do I calculate breakeven point on a shorter-term refi?

Post by ninjamelon »

Interesting. The loan value is $450K. Using this formula, then:

3,700 / (450,000* (3.75%-2.75%)) = 3700/4500 = 8.2 months to breakeven

I learned something new today. This is really helpful -- thank you for weighing in.
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