With mortgage interest rates still low, it remains an ideal time for many homeowners to refinance. One thing to consider however, before jumping on the refinancing bandwagon, is to find out what your refinance break-even point is. This refers to the point at which you are able to recoup the costs of the new loan and you begin saving money.
How long does it take to break-even?
The amount of time it takes to recoup the costs of the loan depends on several factors like your new interest rate. For some individuals it could be a lot quicker than it is for others. It’s important to think about the reason you want to refinance to begin with and how much it will cost. Your goal might be to lower your monthly payment or shorten the term of the loan so that you pay less interest in the long run.
You might want to refinance your home for other reasons like getting rid of mortgage insurance or taking cash-out from the equity that’s accumulated to pay for home renovations or pay down credit card debt. After considering your objectives and calculating how long it will take to break-even, you’ll need to determine whether you are comfortable with the length of time. There is no rule-of-thumb when it comes to refinancing. You just have to make sure that it makes sense for you and that the benefits outweigh the costs.
What are the costs to refinance your mortgage?
Aside from determining how long it will take to break-even, you should also think about how much it will take too. In general, the costs to refinance your mortgage will include and closing costs, such as:
- Fees to the bank: These include application fees, as well as any discount points that the bank charges.
- Title costs: This includes a title search and insurance.
- Other costs such as appraisal costs, fees for a credit report or attorney’s fees.
- Charges by the escrow company
- Calculate the break-even point on a mortgage refinance
You can now calculate how many months it will take to break even by dividing the total loan costs by the monthly savings.
If the number of months that you’ll pay on your new refinance is a lot more than the number of payments that remained on your original loan, you could be paying a lot of extra interest.
When You Start to Save a Lot of Money
When you refinance to a shorter term, the focus is not so much to have a lower monthly payment but instead, the goal is to save a lot of money in total interest.
Other Factors to Consider
Other questions to ask yourself when considering refinancing are:
- How long have you had the loan?
- How much have you paid down?
- How long do you intend to remain in this home?
The answers to these questions will affect what break-even point will be most comfortable and make sense to you.
If you need some help figuring out your refinance break-even point, use this handy refinance calculator or contact one of our helpful agents to explain it to you in detail.CALCULATE YOUR REFINANCE BREAK-EVEN POINT
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