True Refinance Breakeven Period
There are a lot of people looking to refinance and evaluate the benefit of their monthly savings vs the closing costs, to find a break-even point. But did you know that most people are doing it the wrong way?
Here’s an easy example. Imagine a lower rate from refinancing saves $200 per month. But the closing costs are $2,000. Most people would take the $2,000 in costs and divide it by the $200 in savings, to arrive at a break-even of 10 months. But payment savings are different than actual cost savings.
The interest saved is usually more than the payment savings. In this particular case, while the monthly savings is $200, the interest savings could be $230. The additional $30 is added to principal and reduces the mortgage balance. That means the break-even is really 9 months, not 10.