Break Even Point
The break even point of a housing loan refers to how long a borrower must retain a loan for interest savings to equal the initial fees and costs.
Break even points are most relevant when comparing between home loans.
For example, loan A might have a higher interest rate but lower closing costs than loan B. Should a borrower sign up for loan B, the break even point will be the point where interest savings make up for the extra processing and closing fees compared to loan A.
Any point forward beyond the break even point will be a net profit against loan A.
It can also be very useful when homeowners are considering refinancing to save on interest.
For example, a homeowner might come across a very attractive mortgage at 2% lower than his current loan. But refinancing to the new lender will mean incurring underwriting costs, and also a redemption penalty.
However, a 2% cut in this market can be too tempting to ignore.
In this case, the homeowner should calculate the break even point of the new loan to determine how long he has to keep it in order for interest savings to make up for the costs and expenses incurred for refinancing.
If the breakeven point is within a year, the decision is obvious.
But homeowners should also be mindful of their future plans.
If they intend to relocate within 3 years, a new loan with a breakeven of 3 years or more will be redundant.
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