Keep It Simple

created by Bill Hills - Founder & Chief Consumer Advocate at Loanmind

3 Rules to quickly (but sufficiently) calculate the cost break-even point for your mortgage refinance

Keep It Simple

No need for an advanced calculator to quickly determine if a refinance makes financial sense for you - rough calculations on a napkin, using the Quick REFiMATH Method, will suffice (it's okay if you grab your iPhone calculator to help!)

Don't Ever Compare Monthly Payments

Contrary to popular belief, DO NOT compare your new payment to your current payment when calculating a cost break-even point (your payment is not a cost - only the interest component is a cost). If you compare payments, you will be calculating an incorrect cost break-even point 100% of the time.

Always & Only Compare Interest Rates

Compare your new interest rate to your current interest rate to arrive at your Interest Rate Differential which represents your annual cost savings rate

For loan amounts up to $750,000**

Quick REFiMATH (Before-Tax) example: $500,000 current balance, 7% current rate, 6% new rate, $3,000 closing costs. Annual interest savings: $500,000 x 1% = $5,000. Cost break-even point: $3,000 / $5,000 = 0.6 years or 7.2 months.

Advanced REFiMATH (After-Tax) example: $500,000 current balance, 7% current rate, 6% new rate, $3,000 closing costs, 24% tax bracket, 100% tax deductibility. Annual interest savings: $500,000 x 1% x (1 - (24% x 100%)) = $3,800. Cost break-even point: $3,000 / $3,800 = 0.79 years or 9.5 months.

For loan amounts greater than $750,000**

Quick REFiMATH (Before-Tax) example: $3,000,000 current balance, 7% current rate, 6% new rate, $10,000 closing costs. Annual interest savings: $3,000,000 x 1% = $30,000. Cost break-even point: $10,000 / $30,000 = 0.33 years or 4 months.

Advanced REFiMATH (After-Tax) example: $3,000,000 current balance, 7% current rate, 6% new rate, $10,000 closing costs, 37% tax bracket, 25% tax deductibility. Annual interest savings: $3,000,000 x 1% x (1 - (37% x 25%)) = $27,225. Cost break-even point: $10,000 / $27,225 = 0.37 years or 4.4 months.

** Clarification on Tax Deductibility %

The IRS allows for the deduction of mortgage interest paid on qualified mortgage debt for income tax purposes. Qualified mortgage debt is capped at $750,000 on loans originated after 12/15/2017. In the example above, the tax deductibility of 25% indicates that the cap of $750,000 is 25% of the $3,000,000 Loan Amount.