Refinance Your Mortgage?: – Version 11/2000

This is a worksheet to determine the break-even point if a mortgage were refinanced. The break-even point is the amount of time needed to stay in your present home to realize any actual savings from refinancing the mortgage. Obviously, refinancing will cost something. Therefore, even though the new payments after refinancing will be lower, it will take some time for this "savings" to pay you back for the cost of refinancing. This is your break-even point.

Notice that this worksheet itemizes the likely expenses you will incur when refinancing. List them separately or simply group all expenses as one item in entry #12, Any Other Expenses. Then enter the current mortgage payment followed by the new payment after refinancing. The calculator will then figure the break-even point as a number of months figure.

Another Perspective: This section calculates the internal rate of return on an investment where your refinance expenses are invested, and your savings from the refinancing is a monthly cash flow to you from such an investment. In other words, what if you did not refinance your loan but rather chose to invest the money that you would have used to pay the expenses associated with refinancing, and that investment provides a monthly cash flow to you equal to the monthly savings that the refinancing would have provided? In this case, we will assume that this monthly investment cash flow includes a return of principle -- over the period considered in this section. (In this section you specify the number of years you plan on staying in your home after refinancing. This is the period we are referring to.) If you believe you can find an investment that will out perform the internal rate of return achieved by refinancing (calculated for you in this section), you would be better off to invest the money rather that refinancing.

This concept was provided to us by Phil Storms, who is from the Denver area.