Sample Break-Even Periods

Break-Even Periods ( In Months )   Term Left on Current Loan:    310 months Income Tax Bracket:    27.00%   Term on New Loan:    30 years Points and Costs:     Paid in Cash Points: 1.50% Other Closing Costs as a Percent of Loan Amount Interest Rate Reduction .25% .50% .75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.50% 3.00% 3.50% 4.00%                           0.125% None None None None None None None None None None None None 0.25% None None None None None None None None None None None None 0.375% 81 112 None None None None None None None None None None 0.5% 52 63 76 91 109 136 None None None None None None 0.625% 39 48 56 65 75 85 96 109 143 None None None 0.75% 32 38 45 52 59 66 74 81 99 119 145 None 0.875% 27 32 38 43 49 55 61 67 79 93 108 125 1% 24 28 33 37 42 47 52 57 67 78 89 102 1.125% 21 25 29 33 37 41 45 50 58 67 77 87 1.25% 19 22 26 29 33 37 40 44 52 60 68 76 1.375% 17 20 23 27 30 33 36 40 47 54 61 68 1.5% 16 18 21 24 27 30 33 36 42 49 55 62 1.625% 14 17 20 22 25 28 31 33 39 45 50 56 1.75% 13 16 18 21 23 26 28 31 36 41 46 52 1.875% 13 15 17 19 22 24 26 29 33 38 43 48 2% 12 14 16 18 20 22 25 27 31 36 40 45 2.125% 11 13 15 17 19 21 23 25 29 34 38 42 2.25% 10 12 14 16 18 20 22 24 28 32 36 40 2.375% 10 12 14 15 17 19 21 23 26 30 34 37 2.5% 9 11 13 15 16 18 20 21 25 28 32 35 2.625% 9 11 12 14 15 17 19 20 24 27 30 34 2.75% 9 10 12 13 15 16 18 19 23 26 29 32 2.875% 8 10 11 13 14 16 17 19 22 25 28 31 3% 8 9 11 12 14 15 16 18 21 24 26 29 3.125% 8 9 10 12 13 14 16 17 20 23 25 28 3.25% 7 9 10 11 13 14 15 16 19 22 24 27 3.375% 7 8 10 11 12 13 15 16 18 21 24 26 3.5% 7 8 9 10 12 13 14 15 18 20 23 25 3.625% 7 8 9 10 11 12 14 15 17 20 22 24 3.75% 6 8 9 10 11 12 13 14 17 19 21 23 3.875% 6 7 8 9 11 12 13 14 16 18 20 23 4% 6 7 8 9 10 11 12 13 16 18 20 22 Note: The tables assume that no mortgage insurance premiums are paid on either the old or new mortgage, and that the user would earn 2% before tax on upfront and monthly payments had they been saved instead of spent. INSTRUCTIONS ON USING THE TABLES 1. The first step is to find the page that refers to the number of points you pay on the loan. (Points are an upfront charge expressed as a percent of the loan balance. 1 point equals 1% of the loan.) This page above applies to a loan with 1.5 points. 2. Step 2 is to subtract the interest rate on your new loan from the interest rate on your old loan. This is the "Interest Rate Reduction", shown in the leftmost column. Run down the column until you get to the number that is closest to yours. Lets assume this is 1.5%. 3. Add up all closing costs other than points, escrows and per diem interest. Divide this number by the loan amount. Run across the column headings at the top, showing "Other Closing Costs as a Percent of Loan Amount", until you get to the number that is closest to yours. Lets assume this is 2.0%. 4. Your break-even period is shown in the cell where the 1.5% row and the 2.0% column intersect. It is 36 months. 5. You might want to compare two combinations of points and interest rate on the new loan. For example, when the current loan rate is 7%, you might be choosing between a new loan at 6% with 1 point, and one at 5.75% with 2.5 points. In that case, you compare the break-even with a 1% interest rate reduction with the break-even on with a 1.25% rate reduction. The shorter break-even is the better choice.

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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