Overview

Main Menu Name: Breakeven

Calculates the monthly pretax savings possible through refinancing, the monthly savings through refinancing after tax deductions are considered, and the number of months required to pay off the costs of refinancing and break even.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

As mortgage interest rates decline, refinancing (borrowing new money to pay off old debts) may be advantageous. Refinancing may make sense regardless of whether the mortgage is a conventional fixed-rate mortgage or adjustable with monthly payments rising and falling with market rates. Lower fixed rates do lock in smaller payments but total costs should be considered before refinancing.

In the case of fixed-rate mortgages, refinancing should be considered when an interest rate is at least two percentage points below the current rate being paid. This two-point spread is usually the minimum needed to offset refinancing charges.

Refinancing costs include the following items:

• new title search and title insurance
• New mortgage loan origination fees (usually 1% of the loan amount)
• "Points," the current fee charged by lenders for mortgage loans (one point equals one percent)
• Recording fees
• Notary fees
• Distribution fees for title company
• Application and sometimes commitment fees for mortgage company
• Appraisal fees
• Credit report
• Possible termite certification
• Possible attorney's fees
• Possible survey fees
• Possible document preparation fees

The necessary spread increases as the length of time the property will be owned decreases. In other words, a wider spread than two points may be needed if the property will be held only a short period of time. This is because it takes time for lower payments to offset the significant cost of refinancing. Prepayment penalties (illegal in some states) will also increase costs, and therefore increase the spread necessary to make refinancing worthwhile.

Computations must take into consideration the impact of income taxes, and deductions for mortgage interest must be factored into the calculations.

"Recasting," a concept popularized by Realtor and radio commentator Russell E. Miller, is an alternative for some homeowners. Recasting reduces the interest rate and therefore the monthly payments, but instead of practically starting from scratch, recasting requires only that the present mortgage "note" is modified and that a new settlement is not required. The catch is that the mortgage must still be held in the lender's investment portfolio, the mortgage must be a direct reduction conventional type loan, and the lender must agree to the recasting.

Why should I use this calculator?

• To decide whether or not to refinance a mortgage.
• To decide if recasting a mortgage is feasible. The major difference is that recasting costs are considerably lower than refinancing. Recasting costs include points, the cost to prepare a "modification to the Mortgage Note Agreement," recording charges (assuming the lender chooses to record the modification agreement), and possibly a title "bring down" report, and the cost for an endorsement to the existing title insurance policy if required by the lender.

Getting Started

When mortgage interest rates decline, refinancing (borrowing new money to pay off old debts) may be advantageous. Refinancing may make sense regardless of whether the mortgage is a conventional fixed-rate mortgage or adjustable with monthly payments rising and falling with market rates. Lower fixed rates do lock in smaller payments but total costs should be considered before refinancing.

In the case of fixed-rate mortgages, refinancing should be considered when an interest rate is at least two percentage points below the current rate being paid. This two-point spread is usually the minimum needed to offset refinancing charges.

Refinancing costs include the following items:

• A new title search and title insurance
• New mortgage loan origination fees (usually 1% of the loan amount)
• "Points, the current fee charged by lenders for mortgage loans (one point equals one percent)
• Recording fees
• Notary fees
• Distribution fees for title company
• Application and sometimes commitment fees for mortgage company
• Appraisal fees
• Credit report
• Possible termite certification
• Possible attorney's fees
• Possible survey fees
• Possible document preparation fees

The necessary spread increases as the length of time the property will be owned decreases. In other words, a wider spread than two points may be needed if the property will be held only a short period of time. This is because it takes time for lower payments to offset the significant cost of refinancing. Prepayment penalties (illegal in some states) will also increase costs, and therefore increase the spread necessary to make refinancing worthwhile.

Computations must take into consideration the impact of income taxes, and deductions for mortgage interest must be factored into the calculations.

"Recasting," a concept popularized by Realtor and radio commentator Russell E. Miller, is an alternative for some homeowners. Recasting reduces the interest rate and therefore the monthly payments, but instead of practically starting from scratch, recasting requires only that the present mortgage "note" is modified and that a new settlement is not required. The catch is that the mortgage must still be held in the lender's investment portfolio, the mortgage must be a direct reduction conventional type loan, and the lender must agree to the recasting.

Entering Data

1. Current Monthly Payments:  Enter the current monthly payments made.
2. Projected New Monthly Payments:  Enter the projected new monthly payments.
3. Current Tax Bracket:  Enter the current income tax bracket.
4. Total Refinancing Charges:  Enter the estimated total refinancing (or recasting) charges.

Results

The program calculates the monthly pretax savings, the monthly after-tax savings, and the number of months of lower payments necessary to break even.