Refinancing your mortgage loan to one with a lower interest rate makes good financial sense — usually. It all depends on how much lower your interest rate will be, how much you owe on your loan, and how long you plan to stay in your home.
Refinancing a mortgage isn’t free.
Costs vary by lender, but you can expect to pay from 1.5 percent to 2 percent of your outstanding loan balance to close a refinance. If you owe $200,000 on your mortgage loan, that comes out to $3,000 to $4,000 — no small amount. But if your monthly mortgage loan drops by enough, you’ll recoup those costs quickly. Then, the savings you enjoy each month will start adding up.Determining how long it will take you to break even on your refinance requires a bit of math. Let’s crunch the numbers.
Finding the break-even point
Say you have been paying off a $250,000 30-year, fixed-rate mortgage with an interest rate of 4.50 percent. Your monthly mortgage payment — not including the extra costs of property taxes and homeowners insurance — will be about $1,266.
Now, say when you’re ready to refinance, your mortgage balance is down to $200,000. If you refinance that balance to a new 30-year, fixed-rate mortgage with an interest rate of 3.85 percent, your estimated monthly payment, again not including taxes and insurance, will fall to about $937 a month. That’s a savings of about $329 a month, or $3,948 a year.
If you spent $3,000 in closing costs on your refinance, you’d hit the break-even point on your loan in less than a year.
But refinancing doesn’t always come with such a quick payback period.
For example, if you have been paying off a 30-year, fixed-rate loan of $200,000 at an interest rate of 4.15 percent, your monthly payment, not including taxes and insurance, would be about $972. Say you now owe $190,000 on this loan and you refinance it to a 30-year, fixed-rate loan with an interest rate of 3.85 percent. This will drop your monthly payment to about $890, a difference of $82 a month or about $948 a year.
If it costs you $3,000 to refinance that mortgage, it will take you a little more than three years to hit the break-even point. If you plan on living in your home and paying off your new mortgage for…
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