Decide When to Refinance


bungalow2_280x370Q: How do I decide whether it makes sense to refinance my mortgage at a lower interest rate?

In this example, imagine that you’re refinancing a $160,000, 30-year fixed mortgage that is currently at 6.5%, into a 30-year fixed at 5.5%. Your current payment is $1,011 and you have 25 years left on your mortgage.

A: Start by doing a cost-benefit analysis. A step-by-step guide:

    1. Ask your lender to give you a detailed breakdown of closing costs, which are usually 2% to 4% of the total loan, and typically include an application fee, appraisal and inspection fees, credit check, and attorneys’ fees.


      In this example the approximate closing cost would be: $3,630
    1. By refinancing, you will lower your payment. Ask your lender what that lower amount is.


      By refinancing, your monthly payment would drop by $103 to $908.
  1. Divide the refinancing cost by the monthly savings–$3630 divided by $103 = 35.17. That’s the number of months that you would need to remain in your house to break even.


You would have to live in the house for about 35 months—or three years—to break even on what you spent refinancing.

If you plan to in your house for less than three years, it doesn’t make sense to refinance your mortgage. Use this calculator to do your own ballpark estimate.

Other considerations:

    • By refinancing, you start from scratch; thus you pay mostly interest and little principal on your loan for several years.


    • Still, you would about $23,557 in interest over the full term of the loan (i.e. 30 years).


  • If you’re not going to stay in the house long enough to pass the break-even point AND reap some of the interest gains (say, 10-15 years), then a refi would only serve to lower your monthly payments.

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