Mortgage Refinance: Calculate Breakeven Points

by Larry from Spartanburg, NC

Ask Kate about mortgage refinance and how to calculate breakeven points: Many homeowners want to know if refinancing a mortgage is worthwhile. Sometimes this is determined by calculating a breakeven point based on lowering the monthly payment. But there is a second type of breakeven point that is more geared to borrowers who are opting for a 15 year mortgage term.

Calculate Breakeven Point on 15 Year Mortgage Refinance

By Larry from Spartanburg, SC

Kate,

I'm currently on 30 year fixed rate mortgage at 6.5%. I have 22 years left with a payoff of $97,886. My current payment is $826 which includes tax and homeowner's insurance.

I can do a streamlined conventional refinance for 15 years at 3.3%. The proposed mortgage payment rises to $848 which includes escrow money. Estimated closing cost are $3914.

By my calculations, the breakeven point will be 2 years. Is this right? Please help.

P.S. I also need to mention I am 64 years old and plan to work a few more years.

Ask Kate answers: Calculate Breakeven Point on 15 Year Mortgage Refinance

Hi Larry,

There is more than one breakeven calculation to determine if refinancing a mortgage is worthwhile.

Here's a common one.

Calculate Breakeven Point: Compare Monthly Payments

Many homeowners consider that the breakeven point has been reached when the difference between the current payment and the refinanced payment offsets the amount they paid in closing costs.

Here's an example: A mortgage payment is $1000, after refinancing it drops to $800, and the closing costs are $3,200. In this scenario, the breakeven point would be 16 months: $3,200 (closing costs) / $200 (difference between the two payments) = 16 (months). Now let's look at a second breakeven point.

Calculate Breakeven Point: Compare 15 Year to 30 Year Mortgage Terms

In your case, the house payment is going up because you are refinancing from a 30 year term to a 15 year term. So, I am going to assume you're referring to breaking even in the reduction of the principal balance.

15 Year Fixed Rate Mortgage Amortization Schedule

Here's an example of the principal reduction on a 15 year mortgage.

A homeowner's loan balance is $200,000 before refinancing. He rolls $2,000 in fees into the mortgage balance to refinance for 15 years at 3.3%.

So even though he'll pay off his mortgage more quickly, he has temporarily increased his principal balance.

But to see how quickly he'll start reducing his principal balance on a 15 year term, look at this estimated amortization schedule. After only 1 year, he has already reduced his loan balance by a whopping $10,585!

30 Year Fixed Rate Mortgage Amortization Schedule

Now compare his estimated amortization schedule if he refinanced the identical loan amount for 30 years. (Note that in my calculations, I raised the interest rate to 3.8 percent since 30 year terms run about a half percent higher.)

The loan balance after 2 years is only reduced by $3,683!

Even though these numbers are not identical to yours, you can see the mortgage reduction that is reached in 2 years on a 15 year term takes approximately 8 years on a 30 year term.

Use My Mortgage Payment Calculator

Using these examples, you can calculate your personal breakeven points with my mortgage calculator. Go to Home Mortgage Payment Calculator and Tutorials to learn about calculating monthly payments, early pay-off, and amortization schedules.

Or, if you prefer to skip the tutorials, go straight to Super Kate's Mortgage Rate Calculator to begin calculating like a pro.

Best wishes,

P.S. As far as your age and intention to continue working, I'm not qualified to answer your question! But I hope you'll run your plan past a financial planner and let us know what you learn!

Have You Seen These Ask Kate Answers

• Zero to Low Down Payment Programs for Home Buyers
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• FHA Prepayment Penalty News and 3 Day Right of Rescission
• Cash Out Refinance: No Closing Costs vs Lower Rate

You are invited to ask Kate a mortgage question. Or you can post a comment by clicking the link near the bottom of this page.

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